Eight Associates hosted a breakfast roundtable on ESG Investing and the pros and cons of engagement vs divestment approaches with three expert panellists:
Nuno Brito e Cunha,
Head of ESG and Sustainable Finance
Chief of Staff, Philanthropy Services
Head of ESG, Barings Real Estate
Head of ESG Business Development
Our panellists who have experience across a multitude of asset classes ranging from Real Estate, Equities, Debt and Philanthropy shared their views on;
1. The definition of sustainable investing,
2. What good engagement practice looks like?
3. Double materiality and how best to manage this.
Can You Define Sustainable Investing?
“Sustainability means different things to different audiences and so it is important that we define what we mean by Sustainable Investing at the beginning of every conversation” – Anthony Donatelli
It was recognised by all panellists that sustainability means different things to different people, which is one of the main challenges associated with sustainable investing. One way around this for asset managers is to be upfront and transparent about the investment criteria they are using to define sustainability. The other important element lies grounded in a deeper understanding of the interconnecting systems of how companies operate. It is not all about Net Zero and so we need a more holistic approach to sustainable investing, one that considers appropriate solutions that account for the Social as much as the Environmental components of ESG. All panellists recognised the positive impact that the SFDR and EU Taxonomy regulatory principles are having on this topic and how this has unified definitions and allowed for benchmarking between asset classes.
“Essentially, Sustainable Investing is about investing within planetary boundaries. So, within the carrying capacity of the planet, while making a positive a social contribution as well” – Chris Perceval
Ditching and Switching
“Offloading polluting assets to less accountable owners doesn’t equal good stewardship” – Nuno Brito e Cunha
Ditching and switching as a tool for balancing investment portfolios can all too often entail offloading polluting assets to less accountable or responsible owners and was largely accepted by the panel and the roundtable as the wrong approach to take with sustainable investing. Having ruled out divestment as an overarching strategy, the panellists focused on establishing what good engagement looks like. It needs to translate into specific targets, that are monitored to ensure key stakeholders stay on track. A focus on local procurement in the real-estate investment universe was a popular suggestion but it was quickly recognised that there is no one size fits all to good engagement. Good engagement needs to be collaborative and considered as a short- and long-term approach. However, all panel members acknowledged that the fossil fuel phase-out and the Net Zero transition needs to accelerate, as well as the need to introduce stronger regulation if we are going to see meaningful outcomes. Interestingly the panel also mentioned that divestment as a tool to deal with bad actors should not be disregarded. It can be a way to help speed up this transition as the threat or reality of divestment can lead to more immediate action.
“When you think about engagement, you have to be able to speak their language around what is achievable” – Kristina Arsenievich
Managing Double Materiality
“Double Materiality – should be measured both in terms of impact and risk” – Chris Perceval
Double Materiality was a hot topic raised toward the end of the roundtable with plenty of questions from the audience on how data completeness plays a key role in identifying both the material risks to an investment and that same investments’ impact on the environment and society. Both the risk to the investment and the impact of the investment should be considered and there exist ESG scoring tools in the market that integrate both qualitative and quantitative data. A strong focus should also be given to adopting internal ESG risk ratings as part of the due diligence process for investments, this should drive stronger outcomes. Above all the data needs to be transparent and clear about where and why the investment is having an impact.
“Ultimately, we are seeing a fundamental rewiring of the system” – Chris Perceval
In summary, instead of divesting, asset managers who want to have a sustainable impact should invest and exercise their rights of control to change corporate policy. ESG policies only work to enact change if they have enough teeth, therefore when choosing engagement and the tools that go with them, it is important to modify an investment portfolio to ensure measurement completeness, data tracking and embrace a holistic approach.
“Due to the complexities of every organisation, there is no one way to introduce ESG. So you have to think about what works for your particular context and what are the benefits and long-term returns?” – Kristina Arsenievich
Thank you all for attending and a special thanks to our panellists for their time.