Last month, Wealth DFM hosted one of our most popular webinars to date. It was a fascinating and fact-filled session discussion, ably chaired by Julia Dreblow, with top industry experts sharing their knowledge. Dreblow is a sustainable and responsible investment specialist and will be well know to readers of WealthDFM and IFA Magazine as Director of SRI Services and founder of Fund EcoMarket. Joining her to cover a wide range of questions was Maria Municchi, Manager of sustainable multi-asset strategies from M&G Investments, Dr. Chris Mellor, Head of Equity and Commodity ETF Product Management at Invesco and Max Middleton, Investment Manager at Vala Capital.
After welcoming everyone, webinar chair Julia Dreblow opened the discussion by commenting on the diversity of the panel, in terms of product design. Over the past 30 years her own efforts have emphasised the need for the sector to work collaboratively on sustainability and ESG, and even more so now to address the systemic risks that are apparent and to help solve the problems of climate change and biodiversity loss.
Definitions and subcategories for ESG
Discussions opened around the definitions of ESG. These were outlined in the three separate categories, of environmental, social and governance, and upon which companies, funds or assets are scored. From these subcategories can be developed the following:
- Environmental: includes such areas as carbon emissions, waste management, biodiversity, impact, air and water pollution.
- Social: relates to issues like gender diversity, human rights standards, labour standards, employee engagement, and occasionally customer satisfaction.
- Governance: consideration is given here to board composition, elements like money laundering practices and the policies in place around these.
Performance is then measured against these characteristics in a variety of ways. The emerging thesis is that in addition to ensuring that business is done in a more ethical way, good ESG metrics correlate with better risk-adjusted performance than if you just consider financial metrics alone. That’s because these are areas that, while not necessarily directly feeding into profitability, create the foundations for forward looking management and sustained success. Advocates of ESG say that this is tied to a very real financial benefit.
As Invesco’s Dr. Chris Mellor highlighted, ESG involves a spectrum of investing approaches from the darkest green, with significant ethical exclusions and selections of stocks to promote ESG outcomes, through to a very much lighter green with more minimal ethical screening – and a range of options in between. From his perspective the growth in ETF strategies has been incredible in recent years, with assets and the number of products more than doubling in the space of 18 months. There are also a growing number of products that are more thematic in approach, so more climate-focussed, such as solar and clean energy also come into it.
Can you be a responsible investor when following an index?
Reflecting back to the question Mellor commented that there remains a misunderstanding of what passive investing is. The discussion ensued around the various anomalies associated with index tracking and ideas such as designing an index that will efficiently and effectively select stocks based on whatever ethical criteria or whatever ESG criteria you define.
As Mellor explained, with physical ETFs, it’s very straightforward because you own the basket of equities that you’re voting on, commenting “to put that into context, Invesco manages $1.4tn of assets globally. We have about a quarter of those in ETF assets and we leverage for the ETF assets from our actively managed portfolio managers’ knowledge.” The conversation extended to detail of synthetic vs. physically managed ETFs and the differences from an ESG standpoint.
Active ownership and stewardship is absolutely key according to M&G Investments’ Maria Municchi. For her, it is crucial to make sure investments are aligned to M&G’s own culture and that of underlying clients as is taking the opportunities to engage with companies and specific issues. She cited the example of green bonds and the importance of understanding how issuers intend to use the proceeds in such instances.
Dreblow added that from an investee company’s perspective (at an AGM or EGM) when you’re involved in something like climate action or any other engagement programme, it doesn’t necessarily matter if the approach is active or passive management and “different strategies can work together to meet client needs.”
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