Podcast: What you need to know about ESG
Podcast: What you need to know about ESG
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Today's new approach to sustainable investing
In the 1990s, sustainable investing was a process of exclusion of "taboo" industries such as alcohol, tobacco and firearms. Since then, sustainable investing has had huge shifts in methodology; it is now a process of inclusion rather than exclusion.
At Schroders, we combine 2 new sustainable investing approaches to ensure investors achieve a robust portfolio:
The first is an inclusionary approach, where we systematically assess long-term trends and commit to active ownership and engagement. It does not mean we shun away from "bad" companies, but instead we recognise both their risk and potential, and help these companies improve their sustainability practices which in turn generates alpha.
The second is a best-in-class approach, where we suss out sustainable leaders with compounding growth stories and have sound stakeholder engagement policies in place which is key to their long term success.
Today, it is also difficult to see environmental, social and governance (ESG) factors separately they are becoming increasingly intertwined. Since the onset of the pandemic, companies have been putting more focus on the 'social' portion (e.g. employee welfare). However, how well companies treat their employees is intertwined with policies that are formulated at the governance level, for example, access to management, rights of minority shareholders and capital allocation priorities. Such overlaps in the 'E', 'S' and 'G' factors are very common now. The lines are greying and investors should look at these 3 factors as a whole rather than in silos.
An active, proprietary approach to ESG investing is key
Despite the perception of transparency, many passive products disclose surprisingly little about how they actually implement ESG factors. The majority of them rely on a single third party ESG rating provider. Their rating methodologies typically emphasise tick-the-box policies and disclosure levels, data points unrelated to investment performance and/or backward-looking negative events with little predictive power. Most of the inputs to these scores relate to policies rather than more tangible measures of performance.
This is less of an issue for an active management firm, where stewardship is an important element of its role and a responsibility of fund managers, analysts and sustainability experts alike. Oversight is made easier by an active investment philosophy, where regular management meetings can be complemented by targeted engagements on specific company, environmental and social issues.
Could US' environmental regulations rollback affect the rest of the world?
While we have emphasised the importance of companies taking ESG into consideration for its business model to remain sustainable in the long run, there has been an environmental regulation rollback in US which could potentially result in US companies laxing on environmental practices. But the reality is that we're still a global economy. The focus on sustainability in other parts of the world will help keep up the sustainability standards.
For example, the European Union has embarked on a sustainable finance plan and has a strong ambition to be a global leader of sustainable investing. It's a matter of time before ESG integration becomes a hygiene factor in investing; a base-line requirement for asset managers to incorporate into all investment processes. We are going to be seeing additional corporate disclosures being mandated around the world, and if US companies want to be operating in regions outside of US, they will have to abide by such regulations.
That said, with the US presidential elections fast approaching, should there be a shift in the white house, we're hopeful for improvements in sustainability policies as US presidential candidate Joe Biden and his running mate Kamala Harris are both advocates of environmental and climate justice.
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