Environmental, Social and Governance (ESG) criteria are the order of the day when it comes to investments. These criteria refer to the factors that make a company sustainable through its social, environmental and good governance commitment and seem increasingly essential for companies to keep up with the times and continue to attract investors.
But in the face of this ‘ESG fever’ we ask: which of the three is the criterion that investors focus on most, and why? Are environmental criteria prioritised over the other two ‘legs’ of this principle?
To help answer these questions, we tried to find answers with the help of Alban de Faÿ, head of the fixed income platform at SRI Process; Hervé Chatot and Gaël Binot, ESG equity managers at La Française AM; and Yolanda Courtines, co-Fund manager at Wellington Global Stewards Fund.
Alban de Faÿ, Head of Fixed Income Platform at SRI Process
Factors E, S and G should be considered simultaneously, not individually. We believe it is essential to understand how these three dimensions are taken into account in companies’ strategies through the ESG rating. Our approach takes into account the key challenges of each sector and therefore each E, S and G criterion is weighted differently.
For example, Environment is more important in the automotive sector (with a weighting of 40%) or mining (44%) than in pharmaceuticals or banking, where Governance is the most relevant criterion with a weighting of 43% and 47%, respectively. The weightings assigned to each criterion, and ultimately to the different pillars E, S and G, reflect the importance of these issues in the final ESG score.
As a fund manager, we can also focus on a specific dimension to favour an environmental or social issue, but even in this case it is still important to consider the other dimensions.
Financing the energy transition is a key challenge where the E-criterion is preponderant, but we strongly believe that the most important challenge is to ensure that the energy transition is inclusive and that all social issues are taken into account.
We are fully committed to a just green transition that takes social criteria into account. Based on the ‘Just Transition’ concept, last year we launched a ‘Just Transition’ solution, which invests in European corporate bonds that combine a measurable objective of supporting the energy transition with a social score.
The Just Transition score incorporates different social aspects related to the green transition, such as the impact on employees, consumers, local communities and society at large. It assesses, relative to their peers, how companies address these specific social issues. Each dimension is weighted according to its importance in the social acceptance of the transition to a low-carbon economy, with employees having the greatest weight.
Hervé Chatot and Gaël Binot, ESG equity managers at La Française AM
Environmental issues have quickly become a priority for investors, aware that climate change is one of the most important challenges facing the world today. Greenhouse gas emissions continue to rise in many countries and regions. Our planet is warming.
Extreme weather events are occurring more frequently and causing higher damage costs. Urgent action is needed to mitigate the negative impacts of climate change on the global economy.
Countries and governments alike must take more ambitious action to tackle climate change and achieve the Paris Agreement goal of limiting global warming to well below 2°C. We need to accelerate the transition to a low-carbon economy before it is too late.
Climate change is thus expected to have a significant impact on the global economy. This is why we at La Française have decided to develop a climate transition investment methodology for all asset classes. For, until now, investors have mainly focused on climate change at the corporate level (i.e. for equities and credit), but not at the sovereign level. Countries are directly exposed to climate change risks and sovereign bond investors can no longer ignore these risks.
We see climate change as an investment risk, but also as a source of opportunities that will impact the value of investments in the years to come.
Yolanda Courtines, Co-Fund Manager en Wellington Global Stewards Fund
Looking at ESG factors, there is not one letter more significant than others. Our approach takes a more holistic view of corporate responsibility. We call this stewardship. The best stewards must possess strong management teams, durable governance structures, thoughtful allocation of capital and resources, a long-term orientation, and consideration of all stakeholders.
We believe the best Stewards balance their impact on people, the planet, and profits to build long-term advantage:
- Companies lower turnover, build loyalty, enhance culture, and benefit from diversity when they invest in people, including employees, suppliers, customers, and the community at large.
- Companies positively impact the planet and build resilience when they shrink their environmental footprint, consider finite resources, and engage proactively on climate change.
- Companies boost profit when they are disciplined capital allocators – balancing shareholder returns today with investment in innovation, business, and people for tomorrow.
A good steward identifies its material ESG risks and opportunities to lower its earnings volatility and bolster its long-term return potential. It takes care of the planet by transitioning to greener sources of energy and reducing its environmental footprint (the “E” in ESG), reducing the risk of longer-term regulatory issues. It cares about its employees, customers, supply chain and communities (the “S”), for instance, by promoting diversity, equity and inclusion, which help the company understand its opportunities from different viewpoints rather than having yes men. And it has a strong management team and a durable governance structure (the “G”), enabling it to allocate capital wisely and operate with a long-term view to achieve more sustainable returns on capital. It invests in innovation to adapt and grow over time and strengthen its competitive advantage and pricing power by creating a “moat” that makes it harder for others to enter the market or compete.