Join Nathalie Wallace, Head of ESG Strategy and Development of Mirova US, Gavin Marriott CFA, Investment Director for Global and International Equities of Schroders, Samuel Rhee, Chief Investment Officer of Endowus, and Yulin Liu, Investment Lead of Endowus, as they dive into sustainable investing in more detail and share their insights and news on ESG investing.
5:18 Introduction to Endowus' ESG Portfolio
10:24 Introduction to Mirova Global Sustainable Equity Fund
15:15 Introduction to Schroders Sustainable Equity Fund
24:26 Why & How Mirova is different from other ESG Funds
29:19 Why & How Schroders is different from other ESG Funds
32:15 How has the development of ESG changed over the years for the industry and your firm? Is ESG more of a future or a fad?
41:39 How do fund managers incorporate ESG metrics into investment decisions? What is your opinion on third party ESG data and metrics?
47:35 What are the limitations of passive ESG investing? Are the indexes good enough? Is there a way to do passive better?
51:30 Why sustainable and ESG investing has to be active & QnA
55:43 QnA Is there any research supporting the idea that incorporating ESG metrics in the investment strategy leads to better returns?
58:18 QnA: Does ESG investing go against certain investing principles (e.g. Diversification)?
1:02:39 Final thoughts & conclusions on the ESG investing space globally
How Mirova approaches ESG investing and ESG fund solutions (24:26)
Nathalie: Mirova's philosophy is anchored on two core beliefs which is: 1) The world's finance is key to transition to a more sustainable global economy and society & 2) Allocating capital with this in mind is a critical factor to delivering superior long-term risk adjusted returns. This is a coherent & comprehensive approach in the way of the impact of finance but also the impact on the environment and social consideration on capital.
We do this intentionally, as a fiduciary to our clients. In addition we believe sustainable investing is also about active ownership, so we have a very strong stewardship program and advocacy program where we engage with corporates. We vote along the line of understanding two key elements which is governance and disclosure of sustainability KPIs and deliverance - we want companies to deliver tangible outcomes for all stakeholders. Looking at a company's impact and input from all stakeholders is something that differentiates true sustainable investors from pure ESG integration only.
Transparency is paramount for Mirova. It is becoming a very big issue with regulators in Europe to avoid greenwashing but also in the U.S. The SEC has announced an enforcement task force to check how sustainable products are designed and what they communicate to clients to avoid greenwashing. So we build an impact reporting platform that is aligned with the most stringent European regulation.
How has the ESG space developed overtime for your firm and the industry? Do you think ESG is just a green bubble or a future standard? (32:15)
Nathalie: Climate is not a segment of the economy or a sector you need to allocate to. Climate is impacting all of consumer life, through the change of consumer behaviour, the change of companies looking to incorporate the latest technology and cheaper energy production tools, and regulation. The climate objective to getting to net zero is turning into a climate race where in order for a country to remain competitive in the 21st century, it needs to embark on the transition to sustainability.
It is not a fad. It developed from tools and methods to implement ESG integration to a better understanding of how to assess climate risk both transition and physical impact. Today, we have a better understanding on which technology and innovation will be leading our way to a low carbon economy, and gaining knowledge on how companies have an impact on society.
Gavin: I think the importance of these long-term structural trends on climate change and mitigation is one of those things you should not underestimate the power of. On a 10-year view, the market capitalisation of companies that are contributing to efforts to mitigate climate change will be a multiple of what you see today. Admittedly in the near term, maybe the market has moved a bit ahead of itself in certain areas. For example, where people have gotten particularly excited around renewable energy and hydrogen as an alternative energy source. But actually if you extend your time horizon and take a slightly longer term view, the valuation of those businesses can easily be justified, given the size and scale of the change that needs to happen.
The reality is that the world has moved at quite a slow pace in terms of the necessary transition and we're now recognising the urgency. The speed and pace of change is going to increase exponentially in the ESG space over the next few years because it has to otherwise we'll have bigger problems. I think that is a tremendous opportunity for investors.
I think the availability of data and company disclosure has increased exponentially which has changed our approach to ESG investing. Companies now have a better understanding of what investors are looking for. Being able to quantify these impacts is a really important part of the way that our business has changed. We have become much more scientific and systematic in the way we evaluate ESG and sustainability factors.
QnA: Is there any research supporting the idea that incorporating ESG metrics in the investment strategy leads to better returns? (55:43)
Nathalie: 10 years ago we had a lot of academic research and now the evidence is becoming a bit more practical in terms of long-term performance of those funds. Risk adjusted returns is about diminishing volatility, diminishing drawdowns and compounding benefits of being positioned in the right trends quarter after quarter. The idea is to really position this portfolio with low turnover and a very long-term approach. Over time we've experienced an up to down capture ratio that is pretty good given that we've taken this risk into account which lowers volatility on the downside and increases ESG opportunities on the upside.
There was a study done by MSCI which showed over a 10 year period that a company with a high ESG profile outperformed. The firm was mainly driven by their growth and actually delivered faster EPS growth.
QnA: Does ESG investing go against certain investing principles (e.g. Diversification)? (58:18)
Gavin: There is a risk that is prudent to diversification principles can be slightly undermined by pursuing a very narrow approach and I reference that in the context of these fund manager groups who perhaps use third party analysis as the primary mechanism for integrating ESG. I think the structural trends Natalie referenced earlier are going to reshape the world, they are very broad and actually span a majority of industries in the economy in many ways.
It is definitely possible to achieve a very well diversified portfolio geographically, sectorally and from an industry perspective while applying ESG principles. I don't think those risks necessarily apply except when you start to define narrower themes. For example, a focus purely on water supply and distribution, you will come up against the risk of potentially being more vulnerable and less diversified. That is not what we are doing at Schroders nor at Mirova. Our funds are very well diversified across a number of drivers.
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