Investments based around environmental, social and governance (ESG) criteria have swept to the heart of the mainstream – and the effects of that trend cannot be understated.
According to recent Morningstar figures, net inflows into US-based ESG funds hit $21bn in the first half of 2020 – almost matching the record haul that those same funds achieved in the whole of the previous year.
As for how that activity shapes up globally, Morningstar also reports that ESG funds across the world attracted almost $350bn in 2020 – an extraordinary total against the year’s economic backdrop.
Whenever asset managers are preparing to integrate ESG into their investment decisions, the first question they must ask is: “For what purpose do I wish to do this?”
The same applies to investors.
Most investors – and this is valid around the world – want to avoid being exposed to certain types of business activities. That’s a ‘push factor’. But from a more proactive standpoint, the values-driven purposes they would typically explore in the ESG world may include efforts to:
With the help of specialist asset managers, investors can select prospective investee firms on the basis of agreed ESG criteria that follow a particular theme or topic. The investor can then: a) engage with those companies and encourage them to improve and upgrade their overall positive impact; and b) even support individual projects with strong ESG potential.
As an asset manager, one would design an approach that best suits an investor’s chosen objectives. In parallel, though, any investment selection tends to be motivated by one of two main characteristics, which can be phrased as questions:
As we live in a world where factors such as reputation, licence to operate and consumers’ views and demands matter more and more, investors should beware of the potential feedback loops between those two characteristics.
A key component of any ESG investment strategy is exclusion – deciding on which companies or sectors you will not support. There are two schools of thought on this.
The first holds that a responsible investor should avoid being exposed to large numbers of issuers in controversial sectors by simply excluding those sectors in their entirety.
The second holds that it is far more effective to exclude only the most controversial issuers, while engaging with their less-controversial peers to create a positive impact. The rationale here is that if you support a somewhat frowned-upon company that is trying to do better, you will not only help it to improve its practices, but encourage its more contentious competitors to do so, too.
At Amundi, we are strong believers in the potential of a well-considered and thorough engagement and stewardship programme. Meanwhile, our own exclusion policy is alert to breaches of the UN’s Global Compact principles and, in sector terms, excludes a very large number of companies with involvement in thermal coal and tobacco.
For other sectors, we adopt a best-in-class approach that compares within any given industry companies that have adopted best practices, versus laggards.
We have created a proprietary ESG scoring system that our analysts can utilise in tandem with international standards. But on that latter point, we must be cognisant that ESG is a dynamic area in which we should not aim for perfect, across-the-board standardisation. In the end, a major part of any ESG evaluation is judgemental.
So, why and how should corporates approach the process of integrating ESG into their treasury management policies?
The ‘why’ is clear: in order to avoid being excluded from the portfolios of mainstream investors and therefore denied access to capital markets for either long-term or short-term financing, the treasurer needs to understand the objectives of the investor community – and by extension that of asset managers (for example, the value-based approach outlined above).
When it comes to ‘how’, treasurers are already catching up with their fixed-income peers – setting ESG objectives that are progressively aligning their policies with best practices across asset classes. More specifically, there may be greater demand for thematic strategies in the context of treasury management – thanks in particular to the success of green and sustainable bonds.
At Amundi, we are strong proponents of a holistic approach to ESG. We think that ESG integration at corporate level shouldn’t apply only to particular asset classes, but to all of them – and to entire balance sheets, too.
In three to five years’ time, I expect that most treasury portfolios, one way or another, will be ESG-compliant, a trend we are witnessing right now across all asset classes and in the majority of jurisdictions. With the level of engagement growing continually, treasurers are a likely change agent within that trend.
Timothée Jaulin is head of ESG development and advocacy, special operations, at Amundi
