ESG trendy or requisite ?

Is the “ESG” more than a trend? Does it become a pre-requisite for investors? We entered a green revolution and will tend to more socially responsible investments. To succeed in the major shift, we need education efforts, to put more pressure on assets and to be patient. Regulations, accounting standards and investors requirements are some of the main factors to accelerate this fundamental change in investment philosophy.

Sort of ESG chaos despite higher demand

Now, there is a chaos in ESG. There are too many different ratings systems in place. Globally ESG will be more investable opportunity when it is firmed up. The EU taxonomy will also help in designing a classification for what counts as green investment – emerge and increasingly influence share prices. We see today how managers of hedge funds and other alternative investments portfolios are beginning to spot what they see as moneymaking opportunities in ESG investing, an area that is attracting huge investors and even treasurer’s interest. The hedge fund industry, mainly in Europe, has woken to the ESG demand. But there are still a small number of ESG-focused portfolios in the hedge fund space, most of which are clean energy or climate solutions funds. We should not limit these funds to “renewable funds”. As lots of companies will become energy transition stories, there will be more opportunities in coming years for investors. Rising demand for “sustainable” investment prompted managers to change and adapt their strategies and profiles. Data suggest investors flocked to ESG funds last year with European sustainable fund enjoyed particularly strong growth in inflows (i.e., 80%+ according to Morning Star). Once a fund is marked with a sustainable investment label, it makes it more accessible to the large pension funds and big investors searching for such labels. There is no global consensus on what constitutes an ESG fund and investors might not have a clear understanding of what such acronym really means. There is an ESG integration to complete the risk analysis to integrate their risk factors more systematically into analysis and criteria of selection. The problems come from absence of consensus. Is the UN’s Sustainable Development Goals “the” reference? Not so clear… When EU new taxonomy (i.e., Sustainable Finance Disclosure Regulations coming in March 2021 into effect), it may bring more clarity to the situation and help aligning strategies. 

Popularity of ESG investments or green washing?

Popularity of ESG funds has been overshadowed by concerns over “greenwashing”. It is true that getting to the bottom of which funds are truly sustainable requires a lot of energy, time, and experience from asset managers. It is why EU’s introduction of landmark rules mandating greater transparency for ESG funds cannot come soon enough. They need more data to help fund managers to better analyze sustainability of assets. The sustainable finance disclosure regulations require funds to provide information about ESG risks in their portfolios for the first time. A central feature of the EU’s Green Deal, they aim to push more capital towards sustainable activities by injecting discipline into ESG market. These new rules will not be simply good for professional investors but also for retail savers, from older people to millennials sustainability focused. They all want tools to cut through the ESG noise and “jungle”. It means the fund industry will have to revamp its offer as vehicles attract more inflows from investors in quest of ESG-stamped products. Some providers have maybe overstated their sustainability credentials to win business, a trend known as “green washing”. And by imposing to disclose the same formatted data, it will be easier for investors to sort the wheat from the chaff. A lot of mask will fall, I am afraid. Asset managers will have to adapt their products to the new world. This new Non-Financial Reporting Directive will be extremely important in reshaping the whole industry.

“Should I stay or should I go” (The Clash)

Asset managers are debating whether a quiet engagement with companies is enough. I would be tempted to answer this “The Clash” question by a “you should stay”. However, asset managers cannot ignore the pressure. For example, Blackrock announced last year it would eliminate from its active investment portfolios any companies that generate a quarter of its revenues from thermal coal production. BNPP did the same move as many others. But these divestments come at a cost. Should they divest or engage? Such move may have detrimental consequences they need to assess, although there is no choice with growing pressure from millennials, from pension funds and retail investors. It looks like some private bankers only propose ESG funds or recommend a minimum of 20-25% of a total portfolio invested in such funds. Divestment may be a solution to force corporations to become greener. Nevertheless, active shareholders may also influence Boards of Directors to educate them towards more socially responsible strategies. It takes time. This is a complete and profound investment philosophy revolution which may be longer than thought initially. Mentalities are changing and I guess shareholders should flew position of companies towards ESG rather than simply divesting in those companies. Beside the urgency on the “E” part, the “S” and “G” parts will also gradually gain in importance in portfolio weighting. We simply need to be patient and educate funds we invest in. We have reached a new level, a new landing. This revolution is paving the road forward!

Fran?ois Masquelier, Chairman of ATEL