Benefits and responsibilities
From a start-up perspective Vala Capital’s Max Middleton discussed the benefits and responsibilities of having a more direct relationship with management teams and also the importance of having appropriate safeguards in place – especially in venture capital which is such a long term strategy.
Accessing data and data resources
Municchi explained that at M&G they tend to use third party data as a starting point. It’s important to have some visibility and transparency that enable targeting and refocussing to those areas that are relevant. Over the past two years there has been an evolution in the granularity of the data and of its accuracy as well as for use a filtering tool to then enable the team to drill down into the detail.
The panel then discussed the issue of criticisms of different data houses having conflicting data. In response Municchi commented that ‘ESG is not black and white’. In her view, “as long as you understand the processes behind those ratings and how they differ from each other, then there isn’t a problem in comparing and contrasting them.”
Agreeing with her, Mellor added that the differences in data providers are very much a healthy sign rather than a sign of a problem. He pointed out that when you dig into the different data providers and their methodologies, each might be subtly different, sometimes wildly different on ESG data. One of the advantages, he identified in the ETF space is that “this also allows us to work with different ESG data providers across the full range of the market”.
Active stewardship
Sustainability is a key element of the investment strategy and, as Municchi explained, is not something that you “run in parallel”. When looking at future opportunities and trends it’s very important to consider, for example, fiscal policy, which is very recently tilting towards sustainability related areas. As she pointed out, bringing these together is how you can build a portfolio that delivers both from an investment perspective as well as from a sustainability perspective.
A key difference for Vala was highlighted by Middleton, in that for very early stage businesses, you don’t have the same kind of data quality as that information does not yet exist.
Impacts and outcomes
There are regulatory requirements around measurement. Mellor explained that the more specific areas that you focus on in your investment strategy require different reporting. The approach taken at Invesco is to be transparent. He also gave examples to highlight the extent of data and research that is required to ensure that a robust investment process is in place to help deliver ESG outcomes required.
Agreeing, Municchi discussed positive impact strategies, which often relate to the UN Sustainable Development Goals. She asserted how their key characteristics are to make sure that there is intentionality, alignment of intent and also the assessment of the impact – and not forgetting to consider any potential negative impacts too.
When discussing early-stage investment, Middleton added that many of the current frameworks for assessing impact and outcomes are not particularly helpful. He highlighted in some detail how, at Vala, with specialist help they have developed a process and policy that is appropriate for early-stage investing in this regard and how and why it works.
Measuring impact
When it comes to measuring impact, many of the problems are caused by a lack of data, as Chris Mellor explained. He stressed that improving data and pushing towards better reporting from companies on measurements is also a vital thing that ESG engagement and ESG investors are calling for. A detailed discussion then took place around measurement techniques.
Financial performance
Whilst Dreblow made it clear although there must be a clear focus on sustainability, for funds marketed as such, financial performance is still an important factor.
But the panel were united in that these two elements are not unnatural bedfellows. Middleton pointed to the example of recent disappointing performance of Deliveroo’s shares on flotation, which it’s been reported was due to concern around ESG and their treatment of drivers. He comments that “we see this next decade as being defined by a transition towards a more sustainable future and companies that align themselves with that will have a number of advantages.” Amongst the advantages which he highlighted is having preferred access to young talent, who typically want their jobs to have purpose, not just pursuing profit. Vala sees that first hand, he says, with its portfolio companies being able to attract “top talent at below market rates, preferred access to customers and preferred retention of customers as they are individuals who want to lead lives that are more sustainable”. He believes therefore that there is a premium to be paid for businesses that are building sustainable solutions.
Agreeing, Mellor added that the perception of ESG is that it has been a detractor from performance in previous years although this has now changed, with the prevailing view being that ESG strategies outperform rather than underperform. He comments “the truth is, if you unpick what’s going on under the bonnet, a lot of that outperformance and underperformance is driven by unintended sector consequences or sector exposure. It depends very much on how you structure your ESG approach.”
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