By taking a longer-term view, investing strategies based on environmental, social and governance (ESG) considerations have performed well during the pandemic as it has avoided sectors such as fossil fuels, aviation and tourism which have been significantly affected by the crisis.
"About 94% of Asian fund selectors now spend more time reading about ESG that they did three years ago. Indeed just a few years ago ESG was considered more of a niche approach and it was confined to continental Europe. For some it was even a contradiction to the fiduciary duty of asset managers and that inevitably it resulted in lower returns. The tone has significantly changed," according to Jean Raby, chief executive officer of Natixis Investment Managers.
The ESG approach also tends not to invest too much in financials, particularly banks, many of which still pose systemic risks that could affect long-term performance. It also steers clear of companies that take on too much debt, thus exposing their balance sheet to financial risks, says Jens Peers, chief executive officer and chief investment officer of Mirova US and portfolio manager of Mirova’s global and international sustainable equity strategies. Mirova is the quantitative investment unit of Natixis Investment Management.
ESG investing relies heavily on data and their interpretation, a practice known in the industry as ESG scoring. But since the interpretation of data can differ between parties, questions have been raised as to how effective the scores are in evaluating ESG compliance.
Based on experience during the pandemic, ESG strategies that rely on ESG scoring have performed well on average. Says Peers: “There are many ways to look at ESG and there are many methodologies, too. So it is difficult to say whether a company is an ESG company or not. If you look at the big providers of ESG ratings, including MSCI, Sustainalytics and ISS, they all use the same data, but they all get to different conclusions. This makes it difficult to say if companies are really good ESG companies or not. On average, the ones that score well on most of those methodologies have actually done very well during the Covid-19 crisis.”
Anne-Laurence Roucher, deputy CEO and head of Development & Operations at Mirova, says the overall success of ESG investing will depend on developing standardized data that can be used for putting proper labels on financial products.
“Actually, labelling in the financial industry is kind of like labelling in the food industry with organic. Consumers want more organic food, they want more ESG products. We need to have good labels and to have good labels we need standardized data that everybody can rely on. We’re not there yet. It’s going to be a full journey,” Roucher says.
She also makes a distinction between robust data and other types of data which are not as robust, adding that developing robust data requires shared data management.
Mirova focuses on four key distinct steps by first identifying the long-term trends that will reshape the economy over the next decade or so, while focusing on demographic, technological, environmental and governance-related transitions. Companies that are well-positioned in those transitions will outperform the ones that are not.
After identifying the companies that offer solutions for long-term transitions, and well-positioned to benefit from them, Mirova analyzes investment opportunities to make sure they have the right characteristics that will create long-term value. These include high barriers to entry, strong competitive advantages, a well-diversified and strong management team and a strong financial structure.
Mirova also focuses on the ESG characteristics of a company during this process. “Not only do we want to avoid investing in companies that take irresponsible risks, we are also convinced that by having the right ESG characteristics, a company may be able to generate even better returns. Many investors are ignoring this ESG information, which means that not all the information is fully factored into current valuations,” says Peers.