Zero Carbon – From Paris With Love

    Stockholm (NordSIP) – At a recent press day in Paris, boutique asset manager La Française invited NordSIP to follow up on last year’s interview that got us acquainted with the firm’s Zero Carbon strategy. 

    In an update about La Française’s overall strategy and business outlook, Patrick Rivière, Managing Director of the group shares insights about institutional investor’s demand for sustainable investment products. “We have been active in socially responsible investing for many years with limited interest from our investor base,” he starts. “Our ESG products have increased mainly from the conversion of other assets under management, but they didn’t attract many new inflows. In the last two years, the demand from institutional clients has become tangible, due partially to end-clients as well as regulatory pressure.”

    In addition to the general increase in demand, institutions also become more sophisticated in their requirements. “Before we had to explain to institutional clients that they didn’t need to give up performance to make more sustainable investments, now we are moving to a world where this type of investment is mainstream. If you want to differentiate your offering from other players, you have to move into impact. We have to take a new step, from the common concept to something more specific,” continues Rivière.

    On the equity side, La Française already offers a Zero Carbon strategy, and in real estate, sustainability is relatively natural, according to Rivière. “The regulatory pressure in building standards is high, and there is a solid link between ESG and good quality building standards. Moving real estate into sustainable investing is easy,” he says. “Fixed Income is a little more difficult, as the market depends largely on government bonds, where the dynamics between financials and ESG are more complicated and related to politics. A first step consists in integrating ESG into credit analysis, where the investment process is similar to that of equities. That’s what were we are concentrating our efforts at the moment, thanks to our integration of Inflection Point, our in-house RI research and advisory firm.”

    Laurent Jacquier-Laforge (featured picture), CIO for the firm’s equity strategies tells us more about the story behind this new research arm. “Inflection Point is a London-based team of which we recently completed the acquisition. The original idea was to set up an independent advisor to sell its services to other asset managers. However, the price they obtained for selling their ESG scores didn’t measure up against the quality of the research we could capture in-house, so we decided to integrate the business instead,” he explains.

    Now Jacquier-Laforge’s Paris-based equity team combines the Inflection Point scores and analysis to their own five-factor model, based on E, S, G, innovation and adaptability. In addition to the flagship thematic Zero Carbon strategy, almost all of the equity assets rely on responsible investment principles, and the team offers a basic ESG, Eurozone and Pan-European product, managed along strategically aware investing principles. This means the stock-selection incorporates non-financial and strategic views as well as quantitative information. “We measure the capacity of the company to adapt. Nokia is an example of a company which lost its leadership position as it missed a crucial technological leap. New companies benefit and emerge as new market leaders thanks to innovation, while others like IBM, for example, successfully transform their organisation to survive change,” Jacquier-Laforge explains.

    This type of approach is particularly relevant in the context of the Zero Carbon strategy, as change and innovation are desperately needed and will inevitably change every existing company in the market. “Regarding climate change, we have to move fast,” says Jacquier-Laforge, “in fact, we are already late, and many people understand it now. Consumers wonder if they should buy a hybrid or an electric car, how they can insulate their house to save energy, and of course, they start to ask how they should invest their money. Ultimately, they will want to know what the impact is.” Focusing on the factors of change can illustrate how investments can participate in the transition while avoiding risks.

    “For a while, we have been talking about the risks that are related to climate change,” Jacquier-Laforge explains. “The sea levels will go up, and therefore insurances will stop insuring certain types of assets close to the shore, for instance. We have rejected coal mining, as the fossil fuel that is not extracted will not be emitted. This type of reasoning, however, is only one side of the equation. We need to look at opportunities, such as in renewable energy, electric vehicles and companies increasing energy efficiency in other ways. Most companies are currently optimising factory processes, and automation is part of it, and minimising energy consumption is at the top of the agenda. Schneider, Siemens and General Electric all compete with innovations in this area. The fund takes positions that will benefit from the transition phase, as well as from those that will enable that transition.”

    Source: La Française

    The team has split the global investment universe into three categories, to structure the investment approach around this idea. First come transition companies, which typically include heavy emitters of CO2 that have embarked in a transition phase. These represent 15% of the overall universe’s market cap. Then come the enablers which develop technologies that make the transition possible and the solution providers which are pure-players either preventing or actively reducing carbon emissions. The latter category is a the core of the Zero Carbon concept, which uses these types of ‘negative carbon’ or ‘avoided emissions’ investments to offset other positions in carbon-emitting companies.

    Jacquier-Laforge provides some compelling investment examples to illustrate how his team selects investments among the ‘old generation’ transitioning companies. UPS is one. “This is the type of companies we love,” he starts. “UPS is a major emitter because they are in charge of the last mile. They used a new program, Orion, to optimise the last mile logistics at every step. Thanks to this program, they have reduced traffic, thereby cutting CO2 substantially and generating US$ 400 million in savings. UPS has also signed an agreement with Daimler to provide electric trucks in cities. Hamburg in Germany is only one of many cities banning diesel-related last mile deliveries. With this agreement and the progressive substitution of its fleet, UPS will benefit from being at the forefront of the transition while European cities progressively adopt more stringent regulations on diesel.”

    Walmart and VW are other examples Jacquier-Laforge likes to mention, as he knows they will raise eyebrows. “The company’s scores are poor, but ESG is not an absolute score, and we evaluate the evolution of the score more than its current value. VW is a black sheep in the ESG world, as the company misbehaved massively, and it cost them a lot, in financial as well as reputational terms. However, VW will soon likely offer the best electric range of cars available to the public. The outlook is turning. Walmart has a dismal social score, but the overall outlook has been improving thanks to the company’s ‘Gigaton’ program which aims to reduce CO2 emissions in the entire value chain, from supply to final customer.”

    Last but not least, La Française is currently developing an index with German Index provider Solactive, based on the cross-section of favourable ESG and carbon scores. “We will be offering the index as an investment in coming weeks, as we have identified the existence of carbon factors. Since mid-2014, we observe a positive correlation between low carbon and positive performance. For us, this corresponds to a factor effect. Is there a correlation between good carbon management and other successful business practices? Or are investors factoring in a real cost of carbon? It is hard to tell, but the evidence is there. Stanford University recently published a report showing that it is possible to extract 3.5-4% performance per annum (excluding management costs) from the carbon factor. This is what we want to provide through an index strategy.”

    Pictures © NordSIP



    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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