Whether a company links ESG key performance indicators (KPIs) to executive pay and whether it takes account of the physical risks of climate change are among greenwash-proof areas asset managers can use to help retail clients connect with sustainable investments, a conference heard this week.
Speaking at a UK Sustainable Investment and Finance Association (UKSIF) Good Money Week event, sustainable investment professionals acknowledged the challenges facing end investors when it comes to trusting sustainable finance and getting through the layers of data.
However, when asked about metrics asset managers could direct clients to which are not so subject to greenwash, Megan Brennan (pictured), fund manager – multi asset and global equities at Sarasin & Partners, responded: “Management KPIs that they get paid on… Do they have sustainability targets linked to their remuneration?”
Brennan also said a company’s merger and acquisition strategy is worth looking at and she suggested seeing if sustainability is built into the business structure.
“For larger companies, the sustainability function, do they have a chief sustainability officer in the c-suite? Do they have an annual sustainability report? Is there an external audit on their supply chain? Is that mentioned in their annual report and accounts?” she asked.
Finally, Brennan suggested looking at how a company approaches physical risk from climate change: “One thing that we are pushing for in the audit community as well is more accountability on physical infrastructure risks from climate change.
“A good example would be an agricultural company. Are they in an area of heat stress, water stress, etc? [Are they] considering that in the real-world financial implications for the company because that’s an indicator the company is taking this seriously.”
Looking ahead and doing good
Elsewhere in the discussion fellow panellist Wayne Bishop, CEO of King and Shaxon Asset Management, commented asset managers are guilty of not always understanding end investors’ priorities.
“The way ESG is screened with screening agencies, their materiality, ie what weights they are applying to specific factors… a lot of that screening is about risk.
“What they’re doing is clear. It’s good, don’t get me wrong. But, of course, the client is about doing good. And there is a very subtle difference in that nuance that I think a good manager needs to understand when they’re picking stocks or picking what’s going in a portfolio.”
Brennan added: “We find a lot of that data we get from screens is reactive and backward looking. Whereas actually what you want to be is proactive and forward looking. It’s a huge challenge, but the quality [of the data] is improving.”
‘A leap of faith’
Brennan noted another area where asset managers need to improve communication is how they translate environmental concerns into investment decisions.
She used the example of calculating the risk of stranded assets when investing in fossil fuel companies.
“Something the industry needs to better articulate is, ‘this is going into our financial assumptions for the futures of these companies, because we think that there’s a risk of having stranded assets for fossil fuel companies that are spending shareholder capital, assuming oil prices in excess of $100 when actually the long-term trajectory is probably much lower’.”
Investment professionals account for what the future size of the market could be for a product depending on how aligned it is likely to be with consumer preferences and regulation, but ultimately the process can be quite subjective, according to Brennan.
“There is no precedent for this and climate change will not be a linear impact on the way a company’s earnings or assets degrade, for example. The science is there, it’s obviously happening, but the pathway is still somewhat uncertain.
“So trying to put that into a financial model you know, you need to take a leap of faith. And I think we need to be clearer with retail on why it matters and how we’re tackling it in a way that is accessible,” said Brennan.
Talking returns
The conversation also turned to how to engage clients on the performance of sustainable investments. Bishop said performance of stronger ESG and impact products had been “upended” recently.
“For years, particularly since we took that decision to divest and not hold oil and gas, performance generally – relative to conventional – was always outperforming.
“And, of course, 2021-2022 has seen that completely up ended with oil and gas doing well. It’s not just oil and gas, mining’s doing very well, big banks are doing very, very well – all the things you’re either out of or underweight when you take a stronger ESG and impact profile,” commented Bishop.
Being upfront with clients that performance will be different if you are in ESG and impact is important, he noted. But looking at how this might pan out, he said ESG and impact tend to have a more “future focus”, which would continue to bear fruit after this winter when we have stopped battling for gas on the global scale.
“I think people are going to say never again and we don’t want to be hostage – no one controls the wind or the sun yet and the sun hasn’t gotten more expensive and the wind hasn’t gotten more expensive,” said Bishop.
