“Robert Seachoy, Portfolio Manager attended the CFA ESG conference in London on 29 October 2019.  This sold out conference focused on the growing demand for ESG integrated investment practices and how the investment profession is still at an early stage in establishing best practices in this area. The conference focused on where and how investment professionals should integrate ESG into their processes and to establish how ESG should fit in within portfolio construction and portfolio management”.

Summary:

• Well-thought out event, with a broad range of topics/speakers – for instance there was an interesting panel discussion on the client’s perspective, with the CIO of the £30bn Brunel Pension Partnership and the Head of Responsible Investing for the Church of England’s £8.3bn investment fund speaking about their expectations of the industry
• There was a lot less arguing of the case for ESG; discussion was focused more on how to embed it across all asset classes and throughout the entire investment process
• Consistent advice to move away from exclusion methods and towards the engagement and integration of weak ESG companies
• ESG is clearly becoming much more mainstream, the event was very well attended, circa 350 people
• For some reason, the event focused mostly on the E of ESG, with less discussion on social or governance issues; lots of talk on climate change and the Paris agreement
• The sense I got was that ESG is taken a lot more seriously now, and people are keen to get to work on effective taxonomy, pushing for serious policy/regulatory support, and getting the right reporting/tools supplied to asset owners/asset managers so that the key decision makers can allocate capital to the companies that can prove they are taking it seriously too – there was a lot of criticism of the wave of greenwashing within the industry

Key takeaways:

• Fiona Reynolds, CEO of the Principles for Responsible Investment (PRI) reports that the PRI now has over 2,200 signatories, who collectively represent over $82 trillion in AUM:

• The organisation encourages investors to adhere to 6 principles for responsible investing, and is supported in its attempts by the UN
• Fiona suggests that half of the $82 trillion is invested “sustainably”
• Believes that there is enough academic research showing that investment returns are not lower for ESG investors – that case no longer needs to be argued, but there is a still a long way to go to get ESG represented across all asset classes – this is clearly something we at Lockhart understand (ESG being represented by a much more limited landscape)
• Fiona warns that there will be big pressure on governments to significantly strengthen sustainable/climate-change related policy – not only are countries falling short of the Paris agreement, but there is a rachet-up element within the agreement that will force countries to accelerate things like:
  • Coal phase-out
  • Banning of petrol/diesel
  • Increased carbon pricing
  • Reforestation
• Does not think that people/investment professionals are pricing in policy risk (scenario analyses often use current policy status) – and the policy risk increases the longer policy strengthening is delayed

• Mitch Reznick, Head of Research and Sustainable Fixed Income at Hermes echoed other speakers feelings that ESG is being taken more seriously, and pointed to the example of the Italian gas and power giant Enel’s issuance of the world’s first Sustainable Development Goals (SDG)-linked bonds – if they don’t hit SDG targets, their cost of capital increases!

• Elroy Dimson, Chairman of the Centre for Endowment Asset Management at the Cambridge Judge Business School discussed his study (a world first) on the impact of collaborative engagements on global companies – demonstrating the positive impact of ESG activism and engagement
• The evidence showed that there was an abnormal 7% yearly return on the stock prices of companies for which there had been successful engagements
• There was no market reaction on the stock prices of companies for which engagements had been unsuccessful
• Dimson extolled the work done by the PRI, and pointed to their online collaborative platform where anybody can put forward an engagement proposal to a huge audience of global participators, all of whom can vote/join/and collaborate together to improve the chances of a successful engagement

• Fadi Zaher, Head of Index Research & Development at LGIM reported that the Global Sustainable Investment Alliance has seen sustainable investment assets in 5 major markets grow by 34% between 2016 to 2018 – with AUM increasing to over $30 trillion
• Japan saw particularly rapid growth – quadrupling over those two years, going from having just 3% of total AUM in the country invested sustainably to 18% (Europe by contrast is around 50%)

• Fadi explained that a current key challenge is that ESG ratings are too varied to be useful – for instance Tesla get’s an ESG score of 2/10, 5/10, and 9/10 from 3 different ratings companies
• However, he expects to see gradual harmonisation over time – towards a consistency as can be seen in credit ratings
• Fadi spoke about 4 approaches to index ESG investing:
  • Exclusion – Worst of sector stocks are identified and excluded, producing a significantly improved index measured on ESG factors, albeit with the downside of being significantly different to the original market
  • Optimisation – Parameters, constraints and desires are set, without exclusions, creating an index that remains closer to the market but still showing meaningful ESG improvements
  • Tilting – Stocks are given ESG scores, and better ESG companies are given higher allocations, weaker ones are given lower allocations – producing an index that is even closer to the market than via optimisation, with greater transparency
  • Integrated – combination of tilting/exclusions, with active engagement with companies – telling the good ones what they are doing right, and the bad ones what they are doing wrong
• As mentioned before, a key theme throughout the conference was the encouragement of active engagement, and only excluding the worst companies that fail to respond – Fadi also stressed this, and strongly favoured the 4^th approach out of the above
• However, Exclusion remains the largest ESG investing strategy globally as of 2018

• Faith Ward, Chief Responsible Investment Officer of the £30bn Brunel Pension Partnership discussed her experience of fund managers and her future expectations of the industry
• There have been noticeable improvements in managers’ general understanding of ESG, but Faith suggests that not all of them have been using their votes effectively, or think that adhering to the Paris Agreement is for them
• Additionally, Faith was extremely upset to learn that out of 59,000 regulated firms in the UK, only 73 answered an FCA query to provide feedback on climate change issues
• There has been a suspiciously rapid increase in ESG funds across the industry, Faith suspects there is a high amount of corporate greenwashing going on, and is wary of funds which have recently been renamed with an ESG handle
• Useful reporting of ESG data has not been easy to obtain from the industry – there is huge demand from end clients to get more data, but they are not interested in, and unable to relate to figures on carbon emissions, fossil fuel reserves, etc