One thing has been made clear in the fund selection community over the course of 2017: ESG is no longer an added extra for traditional fund management.
For many specialists it has of course been a core concern for several years but the theme is now moving increasingly into the mainstream.
So what is likely to lead ESG investment agendas next year? Will it be a ramping up of renewables, innovation around combating climate change or something else entirely?
‘In 2018 sustainability will be at the forefront of institutional investors’ minds,’ says Citywire + rated Ingo Speich, head of sustainability and engagement at Union Investment. ‘The EU shareholder rights directive demands further disclosure and thorough implementation of ESG criteria in investment processes.’
The Frankfurt-based investor believes there is likely to be increased engagement across both the industry and the investment community, with shareholders urging companies to make sustainability goals a priority in 2018.
‘Regulation will enforce active shareholder voting and we expect next year’s AGM season to be dominated by the debate on remuneration schemes,’ Speich says.
Shareholder involvement is also flashing on Citywire A-rated Daniel Roarty’s radar for the year ahead. ‘Increasingly firms are realising that considering all stakeholders more inclusively is a better path to maximising value than a narrower focus on shareholders.
‘The profit opportunities associated with sustainable development can be substantial and we expect to see businesses embrace the UN Sustainable Development Goals more explicitly,’ says Roarty, who is CIO of AB’s sustainable and thematic team. ‘We think investors will take notice as well.’
Regulation, Speich says, will make ESG an increasingly prominent issue, with legislation and emission targets being particularly key. However, he says the coming year is also likely to focus on technological developments.
‘Science funding and embedding carbon mitigation into corporate strategies will be important for investors,’ he says, ‘especially in light of the international agreement to limit global warming to 2 degrees by 2050. In addition, there is likely to be a stronger focus on sustainable development, which will foster sustainability financing.’
An expert in this field is clean energy specialist Pascal Dudle (pictured), who says investors will be increasingly interested in what is actually achieved by funding sustainability.
‘Investors we talk to want to engage with the reduction of emissions and that’s why companies are also estimating PAE [potential avoided emissions]. PAE calculates the relative CO2 reduction contributed by a company’s products and services.
‘These figures are being reported more and more and are likely to become increasingly relevant due to tougher regulation and a potential charge on CO2 emissions. Companies with a high PAE will be in a position to address climate impact and benefit from their contribution.’
The Citywire AA-rated Vontobel fund manager, who runs both new power and clean technology funds at the Swiss group, says while efforts to improve transparency such as this will remain relevant, they have their limitations.
‘Many companies already measure their carbon foot-prints. However, not all emissions are covered by the data and in its standard form this process does not help mitigate climate change.’
No quick fix
Citywire A-rated Karina Funk (pictured), who co-runs the Brown Advisory Sustainable Growth fund, has some sympathy with Dudle’s reservations. She says challenges remain in the way ESG goals are perceived and executed but more should be done to reward firms that are proactive in this area.
‘There is no silver bullet,’ she says. ‘We have got to a point where people are screening out ESG risks around climate change and longer-term sustainability, but what about those companies improving themselves along these lines to grow better? Why are people not investing in them?
‘It could be the challenge of how does a company keep its processor farm cool in a sustainable way, or how can a food or beverage company cut back on wasted water through the supply chain?
'We are looking at businesses that are boosting their ESG credentials, while also, ultimately, cutting costs by doing so efficiently, which is important as well.’
Considering the mainstream appeal, Funk says there are parallels between the way ESG is being approached now and how the internet was first considered.
‘There was a period at the end of the 1990s when the internet was a theme. People invested in internet funds, but it has gone beyond that now.
‘We are nearing a stage where people no longer discuss ESG as an add-on but as something that just is. Something that investors do not even have to consider because it is already integral,’ she says.
These comments originally appeared in the December-January edition of Citywire Selector magazine.