The coronavirus pandemic is highlighting the advantages of environmental, social, and governance (ESG) integration for both asset managers and corporates in identifying specific areas that can be beneficial to financial performance.
For asset managers, those in a more advanced stage of integrating ESG factors into their investment strategies and portfolios are in a better position to identify companies that can perform better than their peers during and after the health crisis.
For corporates, those undertaking ESG integration into their business models and operations have benefited from being in a stronger position to withstand the immediate impact of the pandemic as well as its longer-term effects.
These can be gleaned from separate studies conducted J.P. Morgan Asset Management (JPMAM) and BNP Paribas Asset Management (BNPP AM) detailing their individual journeys into ESG integration.
In the study titled “ESG Integration, Investment -led, Expert-driven”, published in July 2020, JPMAM presents a 10-point scoring system for ESG integration that is currently being used by their investment teams for evaluating companies on the extent to which they have integrated ESG factors into their business models and operations.
The scoring system, which is based on the Principles of Responsible Investments (PRI) endorsed by the United Nations, includes a host of factors that cover three major areas, namely: research and investment management, which attempts to determine if ESG integration is an integral part of the research or investment due diligence process; documentation, which determines if there is documentation as to how ESG is integrated; and monitoring, which determines if there is a clear assignment of roles and responsibilities in the ESG integration process to ensure risk management and oversight are in place.
The system is now being used by JPMAM investment teams for evaluating companies for their investment portfolios and has worked well in the midst of the pandemic.
For example, it has been determined that companies that invested in human capital management even before Covid-19 has benefited in terms of being much more resilient during the pandemic.
“There is this huge contrast between companies that have taken human capital management seriously versus those who didn’t. Our investment team presented it in this context. Because of this better performance in human capital management, they had overweight this company, and because human capital management became very important during the pandemic, they definitely see the difference in financial performance as well. And that's what we want to see. We want to make sure that our investment teams are using ESG factors in a smart way and that they are using ESG factors that actually help to generate better outcome,” says Jennifer Wu, global head of sustainable investing at JPMAM.
In the case of BNPP AM, the ESG integration process focused on corporate engagement, which also reflects how companies have been adjusting to Covid-19. The report, titled “Post Covid-19 Engagement Themes” published in June 2020, outlines how BNPP AM uses corporate engagement such as annual general meetings (AGMs) and interviews with corporate management to determine their level of ESG integration.
During the 2020 voting season, which was held at the height of the pandemic, most of the AGMs were virtual with hardly any interaction with shareholders (except for questions submitted before the meetings).
“However, virtual AGMs did not affect BNPP AM’s dialogue with the companies which took place before AGMs. We favour hybrid AGMs as opposed to virtual ones that do not allow for interaction,” says Gabriel Wilson-Otto, head of stewardship, Asia, at BNPP AM.
The study found that there was a focus on responsible capital allocation. “By having a solid framework underlying long-term capital allocation strategy, a balance is achieved among different relevant stakeholder interests, that does not compromise their long-term strategies, including their transition pathways. We requested disclosure on the consequences that the Covid crisis had or is expected to have on their business strategies, capital allocation decisions, sustainability plans, their employees and their broader stakeholders such as lenders,” Wilson-Otto says.