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SI Digital Explore: The need to integrate ESG into the investment process

SI Digital Explore: The need to integrate ESG into the investment process

03-12-2020 | Insight
The structural integration of ESG information is not a simple overlay for investors, but should be structurally embedded in all aspects of portfolio building. That was the main message of the second digital forum staged by Robeco with some of the leading lights of sustainable investment.
  • Masja Zandbergen - Albers
    Masja
    Zandbergen - Albers
    Head of sustainability integration

Speed read

  • Covid-19 shows value of integrating ESG as a standard investment tool
  • Data quality allows mainstream approach to risk assessments of portfolios
  • Speakers welcome US return to Paris Agreement and bigger focus on social

Keynote speakers at the live event were the internationally renowned Mercer consultant Helga Birgden and Principles for Responsible Investment CEO Fiona Reynolds. They echoed the vital need to treat environmental, social and governance factors as standard investment tool and not some sort of box-ticking exercise.

Other takeaways from the 90-minute broadcast were that the data needed to integrate ESG was now good enough for anyone to be able to do it, while US President-elect Joe Biden’s plans to rejoin the Paris Agreement was eagerly awaited. And the Covid-19 pandemic and the corporate response to it had elevated

ESG factors to a global consciousness, with a new emphasis on the S for social. More than 500 viewers joined the 19 November event, which was co-hosted by Robeco presenters Erika van der Merwe and Kenneth Robertson, using video links from Zurich to Melbourne. Six Robeco investment and active ownership specialists took part alongside the two keynote speakers.

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ESG proves its worth

Sustainable investing has certainly proven its worth during the coronavirus pandemic, said Helga Birgden, global business leader for responsible investments at the Mercer consultancy. Speaking from her solar-powered home in the Australian outback, she said: “What we've seen during the Covid-19 crisis is that sustainable strategies have generally demonstrated downside risk protection.”

“The performance of sustainable indices during the Covid-19 crisis has been really quite robust. It has made clients better risk managers. They don't just want to manage the base case; they want to be able to be cognizant of the tail risks around it, especially when the range of outcomes can impact returns."

High-quality data is key

Assessing sustainability risks at this level requires access to high-quality data. “We integrate ESG in the entire investment management process,” said Karin van Baardwijk, Chief Operating Officer of Robeco. “To do this, you need to have the right balance between internal data and external data.”

“If you compare it to financial results, access to ESG data is not what it's about – it's about how to use it, how to implement it and how to analyze it. Investors will continuously search for the best optimal mix for data, but then in the end, they will make their own considerations and decisions.”

Looking to the future

Echoing this sentiment, Birgden said it was vital to adopt future-looking scenarios. “In ESG and climate work, we need to draw on historical performance, obviously,” she said. “But what is critical is we also need to look forward. When we undertake stress testing and projections to address ESG and climate issues, we need to think about how to map out a net-zero carbon economy to meet the 1.5 degree Celsius warming scenario.”

“We still need to exercise qualitative judgment, combining quantitative and qualitative data together. While there is an information explosion around understanding human and earth systems, the data will never be perfect. We shouldn't get hung up on that.”

Decarbonizing portfolios

Meanwhile, investors’ focus next year is expected to be on decarbonizing portfolios. “The extension of our exclusion of investments in fossil fuels to all our strategies is a further step in our efforts to lower the carbon footprint of our investments, transitioning to a lower carbon economy,” said Van Baardwijk.

“We will continue to focus heavily in our engagement on climate change and the need to invest in companies to transition to a low-carbon economy. We have put our money where our mouth is and expanded our capacity in the organisation with a climate strategist, an SDG strategist and a climate data scientist this year to meet our increased ambitions.”

“There's a bigger focus on social issues as a result of the pandemic. Topics that have been on our agenda are around labour rights, for example, in the textile and meat industry, and the right to work safely. We will also prioritise social issues in our engagement calendar for next year.”

SI is getting bigger

In all, sustainable investors can take great confidence from being in a growing business, said Fiona Reynolds, Chief Executive of the Principles for Responsible Investment, to which Robeco is a signatory.

“There is certainly is a lot of expertise on sustainability in the market, and it continues to grow as the industry matures in its practices and its scale and maturity,” she said. “A large part of work that we're doing is about trying to get some convergence of all the data standards that are out there.”

“I do think that the new Biden administration gives us a real hope that responsible investment will move forward in the US. Returning to the Paris Agreement is important – but we also then need to see the regulations that would sit under that, committing net-zero carbon by 2050. You can say ‘I'm rejoining Paris’, but there's a lot more to solving climate change than that.”

The S in ESG

Then there is the issue of better promoting the S in ESG, after the pandemic put a higher focus on labor issues, not least in protecting workers from a deadly virus. “A lot of time has been spent talking about climate, and it's obviously an urgent agenda – but we shouldn't forget the social issues,” Reynolds said.

“The S is often like the poor cousin squeezed in the middle. At the PRI, we’ll be having a new focus on human rights, labor rights, modern slavery and human trafficking, freedom of association… all those sorts of issues need to the responsible investment community need to focus more on.”

Becoming mainstream

And will sustainable investing ever become the norm, rather than the exception? “I really hope that we'll see that responsible investment is completely mainstream – that it's not separate from investment, but that it's a critical part of it,” she said.

“We’re getting there, but we're not quite there yet. I would love one day not to actually have to use the words ‘responsible investment’ because we just know that all investment is done responsibly.”

Watch the full video here

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