Client Affairs

Getting Disciplined About ESG, Industry Takes Stock

Jackie Bennion Deputy Editor 15 May 2020

Getting Disciplined About ESG, Industry Takes Stock

More views on the strides of ESG from leading practitioners at Cornerstone Capital; Maitri in Asia, Waverton Investment Management, and Foresight Group. Views cover regional variations in ESG uptake and filling the holes in client reporting and training for advisors.

The list is pretty long for making ESG investing more credible, including high-quality data that clients can understand; more clarity about products and services; proof of real impact; and more transparency to sniff out greenwashing. We received a large response from firms with varying degrees of detail and insight in the latest look at ESG adoption. The industry is perhaps struggling to find a balance between what investors already know, don't know, and are craving clarity on. Below are comments from New York-based sustainable investment group Cornerstone Capital; Maitri Asset Management, largely active in Asia; Waverton Investment Management; and Foresight Group.

Beginning with client interests, Erika Karp, CEO and founder of Cornerstone, said that climate action, food systems, the state of the oceans, women’s economic empowerment and social justice are the themes tending to dominate. But in terms of what drives corporate behavior, profit outcomes, and share prices, "it’s actually governance that comes first, and is first among equals in terms of discipline of ESG analysis,” she said.

Karp says there is no shortage of ways to implement ESG across all asset classes, but clients often prefer direct private deals because they offer "the clearest connection with their objectives". Real assets and real estate feature prominently in holding preferences, and clients typically use impact venture and private equity in conjunction with their larger equity and debt holdings to structure investments at the firm.

Analyzing for sustainability is much the same for public and private companies, she says, and screening is “just the start". But the strategic and tactical questions being asked of companies, in either market, are basically the same. “A beverage or semiconductor company, public or private, needs to think about water efficiency.  A machinery or shipping company needs to think about safety.  A chemical company or food company needs to think about quality in supply chains. It’s all about asking the right questions in the right context to the right companies,”Karp said.

On MiFID II's effects on sell-side research, Mary Haly, director of private clients at Waverton Investment Management, said the group does its own primary research so it is not dependent on sell-side research, and that the squeeze has created opportunity for the firm. “We have expanded our internal research team over the last few years to enhance due diligence around stock selection" based on four investment criteria - durability, opportunity, alignment and valuation - adding that these are the pillars applied to the firm's entire investment strategy.

Karp argues that sell-side research is short-sighted. "The focus is on quarterly earnings reporting rather than structural sector and macroeconomic thinking", has curbed creativity and finding solutions to big global challenges, she said.  “Our answer is to fuse our thematic investment research with our manager research so that we can get the best view of investment strategies that can then be aligned with our clents’ values and priorities."

With many firms and organisations making a big play of ESG, it raises questions about how well versed advisors are across regions.

Offering a perspective from Asia, ESG lead at Maitri Asset Management Edris Boey, said interest in the region is strong, although Asian investors still view it as “a ‘nice to have’ as long as it doesn’t compromise the returns."

“Multinational investors are increasingly bringing their ESG expertise from Europe and North America – both physically, as well as virtually, by building platforms suited to the Asian market,” Boey said. Maitri hired Boey in Singapore to lead on ESG in 2019 and expanded the team this year as ESG analysis has taken a more central role at the firm.

On advisor knowledge and duty of care to clients, “there is absolutely not enough being done," Karp stresses. "Given that advisors are often fiduciaries, there is another reason to move training forward, and not doing ESG analysis means not living up to an investment responsibility." Karps points to the many global conferences covering ESG analysis and investing, and the many training programs. "Honestly, you can start anywhere, as long as you get started!” she said.

Client reporting is another of her concerns, where many advisors offer ESG ratings and rankings but they lack quality and insight. “We deploy an algorithmic solution that starts with the UN Sustainable Development Goals (SDGs) for our clients. From this we use an “Access” lens to create a heatmap that shows how much exposure our clients get to their priority issues."

Without standardization among ESG reporting agencies, "client reporting is inevitably tailored to the information firms want to see or present to underlying investors," Henry Morgan in Foresight's sustainability group said bluntly.  "Some may be focussed more on the creation of full-time jobs, while others will care more about the carbon emissions of a portfolio." Morgan suggests that the increased due diigence and reporting burden can be passed to the investor and that clients will largely drive the kind of reporting they want to see. "If this means they simply want a manager to report on a set number of KPIs, but are happy for the manager to calculate and report these itself, then the cost is minimal. But if the client wants third-party assessments, they will be required to meet the associated costs."

Like many in the marketplace, Maitri's Boey sees ESG as tailormade for uncertain times. While carbon emissions have plunged in the coronavirus fallout, the firm is “keeping an eye on two long-term key concerns: 1) on the Environmental ‘E’ side of things – retaliatory emissions once the world recovers from the virus and doubles down on production to reboot the economy; 2) for Social ‘S’ considerations – whether businesses are looking after their employees now to ready themselves for the expected surge in productivity post-COVID-19.”

Watchful of how companies are responding in the crisis, Boey said Maitri has also signed up to the “Investor Statement on Coronavirus Response,” a measure that supports businesses providing paid leave and prioritizing worker health and safety, maintaining employment, keeping supplier and customer relationships, and practicing fiscal prudence.These may be big asks depending on the capital buffer, national government responses, and what sectors companies are in.

She is in no doubt that ESG investing is here to stay. “It more than doubled globally between 2012 and 2018 from $13 trillion to $30 trillion. In Asia, it has grown more than 15 times from $188 billion to $2.9 trillion in the same period, while estimated total AuM grew only 1.6 times, from $8.2 trillion to $13.1 trillion. ESG investing is developing into the mainstream and needs to be considered in every situation."


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