Lazard Asset Management has released its Annual Sustainable Investment Report, in which it outlines its proprietary ESG integration framework and reveals the outcome of its voting and engagement in 2019.
According to the report, Lazard’s workforce have taken the view investing for the future and maximising shareholder value means taking environmental and social impact into account. As a result, the group integrated ESG considerations across its investment strategies.
Ashish Bhutani, CEO of Lazard AM, said: “We face the human and economic impact of an unprecedented global pandemic as well as significant social unrest stemming from hundreds of years of systemic prejudice. This is clearly a time for listening, reflection, education, and action.
“While we continue to prioritize the mental and physical health of our colleagues, clients, and communities around the world, we remain diligently focused on managing our way through this market turmoil and maximizing long-term, sustainable value.”
In the report, the company outlines three pillars that underpin its approach to sustainable investing: collective responsibility, impactful ownership and continuous innovation.
The firm’s approach means there is no separate ESG team (although it does have an ESG Steering Group that leads ESG thinking), saying sustainability is a core component of its financial analysis.
Bhutani said: “Thinking and operating through a sustainability lens is everyone’s job at Lazard Asset Management. All our key investment professionals are tasked with knowing the ins and outs of the material issues facing their respective investable universes and sharing their insights with our entire global investment organization.”
Materiality Mapping
The group’s ESG integration framework is based on process called Materiality Mapping, which has been integrated across all of its investment platforms. This approach is built on in-depth knowledge of individual companies, their operating environments and how their activities impact society and the environment.
There are three pillars to this approach: integration of research capabilities across all investment teams, proprietary and forward-looking research, and linking the assessment and compensation of its equity analysts to the integration of sustainability-related considerations into their research.
Nikita Singhal, co-head of sustainable investment and ESG, said: “Materiality of human and natural capital issues or governance concerns is very contextual. What is material for one company or sovereign can be very different for another, depending on the geography, industry, sector, or even an idiosyncratic operational or product choice.
“It is therefore critical to have a deep contextual understanding of sustainability considerations and the reason why bottom-up fundamental assessment of such issues lies at the heart of our sustainable investment strategy.”
The report highlights examples of Materiality Mapping across different sectors, such as carbon tax, cyber security risks and supply chain disruption as a result of climate change.
In 2019, the asset manager’s global sector analysts developed and published over 45 sustainable investing frameworks based on their collective assessment of the most material issues facing portfolios.
Nathan Cockrell, co-director of global research, said: “We don’t want to consume or produce static and backward-looking assessments of an exhaustive list of issues for each company. Instead, we do want to focus on those that we believe are financially material.
“By thinking about the interplay of the relevant issues with a company’s future revenues, expenses, and capital allocation on a bottom-up basis, we attempt to price those externalities.”
Sustainability in emerging markets
One of the asset classes the report looks at in detail is emerging markets and how ESG considerations can help earn superior returns in this region.
One such theme within equities is financial inclusion, aiming to increase the economic opportunities and improve the lives of low-income populations, thereby aligning with several UN Sustainable Development Goals (SDGs).
Meanwhile, the group also believes ESG considerations are critical to investing in EM debt, as there is a direct link between a country’s bond performance and the quality of its governance, as well as human and natural capital considerations.
“Our research indicates that countries that are good stewards of the environment, that pay attention to education and equality within their borders, and that govern themselves with transparency and solid policy are also likely to be diligent about paying their debts,” said Denise Simon, EMD portfolio manager/analyst.
“Indeed, the data shows that countries with high ESG scores have lower borrowing costs and are much less likely to default. We believe this link is only likely to strengthen.”
As a result, within its fundamental assessment of sovereign credit, the group weights ESG and economic factors equally, and said ESG considerations have been a key driver of performance in this area.
Engagement
The report also details Lazard’s commitment to engagement and stewardship as the firm believes this is a key part of its fiduciary duties.
Jeremy Taylor, CEO of Lazard AM London, said: “The growing interest in sustainability is likely to prompt a pendulum swing back to active management.
“Active asset managers with the deep investment resources are required to understand how sustainability issues intersect with financial performance. They are expected to have the ability to genuinely embed stewardship practices into the investment process, and therefore will be best positioned to deliver more innovative solutions and superior risk-adjusted returns for their clients.”
In 2019, the group held 4,000 global engagement meetings with company management to understand how they are conducting their business and putting clients’ capital to use.
Lazard’s investment professionals voted at more than 3,800 annual company meetings in 2019 and 37% of the time they voted against management in one or more proposals. However, the group has supported 66% of shareholder resolutions related to human and natural capital, which it believes indicates that proposals are becoming more aligned with each company’s overall strategy.
