Several asset managers and financial institutions remain convinced that environmental, social and governance (ESG) factors play an important role in investing even as the leader of the world’s biggest economy and largest fund market has turned its back on the global climate accord.
In June, US president Donald Trump announced that the US is withdrawing from the Paris agreement on climate change. But days after the announcement it was clear that the rest of America are not about to sit on their hands. At least 13 US states and more than 200 city mayors have pledged to abide by the Paris goals.
Institutional investors, corporates, and asset managers are not turning their backs on the issue either. They understand that ignoring ESG practices could lead to increased investment risks, reduced income, unwanted attention from regulators and complaints from shareholders or clients.
“This is why so many corporates stood up and said, ‘for us it’s an issue; we see it as a risk.’ The US is a very big country, but there are other countries that confirmed their commitments,” says Eugenia Unanyants-Jackson, director and head of ESG Research for Allianz Global Investors (AllianzGI).
“There were also US companies who came out publicly and said they will continue to work towards reducing their carbon footprint and find new solutions [to climate change],” she adds.
AllianzGI has been active in the ESG arena for 17 years with the implementation of several SRI strategies. From 2016, it moved the ESG agenda further forward by making ESG investing mainstream.
Unanyants-Jackson leads the ESG research team in exercising this new mandate. The team is helping AllianzGI’s analysts and portfolio managers identify ESG topics and issues as they relate to companies within their portfolios.
“I think ESG is a very long-term thing because it’s not about just making money. For the companies that we invest in, it’s more difficult to operate successful businesses if you don’t pay attention to your key stakeholders. If you mistreat your employees, you mistreat your customers, you are running against the regulators or what your lawmakers want. Ultimately you will have problems. That’s why ESG is becoming the focus more and more. It’s more difficult to get away from ESG standards for companies, so that’s why it’s becoming more material,” says Unanyants-Jackson.
ESG standards
Portfolio managers receive regular data and inputs from the ESG research team. The portfolio managers can then use the data to study a company’s compliance to ESG standards.
Inputs from the research team has culminated into a proprietary ESG rating system that gauges ESG-related risks in portfolio holdings and companies they plan to invest in. ESG ratings are not aggregated so there are separate ratings for environmental, social and governance factors.
For example, the ESG rating system can be used when investing in companies issuing green bonds or bonds that invest in green projects like renewable energy.
“When investing in green bonds, the portfolio managers can use the ESG rating system. If you look at a company by itself, it may not be best-in-class in terms of its sustainability perspective. But we would finance a particular green bond issue because it’s doing precisely the job of helping the company transition and move towards renewable energy,” says Unanyants-Jackson.
AllianzGI is working on a system where the portfolio managers will document how they use the ESG ratings. “We have a lot more work to do. There is still a lot more education involved. But this is a good start,” says Unanyants-Jackson.
