Between Impact and Custom-Made Sustainability

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Stockholm (NordSIP) – Just before the summer, we met with Cindy Rose (pictured), Head of ESG at Aberdeen Standard Investments, who told us about her firm’s customised approach to ESG integration as an alternative to straight impact investing. She also shared some interesting thoughts about the rapid expansion of sustainable investing and how this transformation can transfer significant power to individual segments of the sustainability industry.

Aberdeen Standard Investments, which currently counts €15 billion under management for sustainable driven approaches, offers an impact fund where investments are made along eight pillars based on the UN Sustainable Development Goals (SDGs) while meeting a number of investment hurdles defined by ESG criteria. “In addition to the criteria we have set up in an objective and measurable way for the impact fund, a company must also show intentionality to become a component of the fund. It is a very research-intensive process,” Rose explains.

In addition to this fund, Aberdeen Standard Investments often proposes custom-made strategies, to fit the unique needs of each client. “It’s all about the definition of what is sustainable,” says Rose. “We need to understand the background of each of our clients to determine what sustainability means to them. We can’t just superimpose on them what we think it should be. Do they expect more long-term returns or do they want to sleep better at night? What is ‘good’ or ‘bad’ may be different for each client. What do they need to report, and to whom? In France, for instance, it has become a legal requirement for pension funds to report on carbon emissions. It is not for us to define if this constitutes sustainable investing, but it is a constraint we are well prepared to integrate into the investment process for a French client, for example.”

One of the challenges Rose encounters often is related to the idea of giving up return. “People, in general, think that, because you narrow your focus to sustainable investment targets, you have to take a hit in terms of return. It is hard to prove or disprove this idea because people don’t distinguish between impact and sustainability, and there are no adequate benchmarks to compare a strongly stylised fund to. We need to take into consideration a relevant time period. Can we calculate a Discounted Cash Flow of the capex for sustainability? The concept of ESG has to be literally ‘baked’ into the strategy at the onset for it to be effective in the long term. The client has to be committed to the idea of sustainable investing, e.g. impact, and be in it for the long term. Our mission is to be as transparent as possible, but the clients have to come on board with the philosophy of our funds. Otherwise, we need to think of something else for them.”

Rose mentions an example of a tailor-made strategy. “The client needed a large bond fund with a carbon tilt. They wanted to invest in names that are ‘best-in-class’ in terms of carbon, or, in other words, the top half of the companies with the least emissions. We implemented a screen and super-imposed the extra requirements the client had. Part of the need was also reporting and engagement, of course.” While this type of product does not provide the same type of sustainability as impact investments, it is a step forward. “If pension funds only had 25-year old beneficiaries, they could look at all kinds of innovative solutions, but it is not the case. People who will retire tomorrow have immediate requirements. This is why there is a need for solutions that combine true impact and needs for financial returns.”

While Rose describes the dilemma in straightforward terms, the decision-making process is often very complicated and time-consuming. “Pensions need to have experts on their panel,” says Rose. “I have spent a lot of time consulting for pension and endowments on how to state their principles. How do they see ESG? How should they wrap those thoughts in their investment principles? On the back of those decisions, they need to figure out what they expect the managers to do concretely, and how it affects manager selection. Company engagement becomes, again, an important component of that process.”

From her experience talking to many different institutions, Rose also gives us an idea of the geographical differences she has observed. “ESG in the United States is just not there yet,” she says. In Canada and Australia, they have their flavours of ESG, as the regulators have written some principles into the law, like in France. In other European countries, investors are often looking into precise criteria. Asia is also developing its own direction, as most organisations are catching up and filling the gap, especially in Japan. In emerging markets, we are still in the process of mostly answering the questions investors have.”

In short, when it comes to ESG integration, Aberdeen Standard Investments provides tailor-made investing in a transparent way. But before concluding, Rose gives us some food for thought. Much time is spent on the nuances of ESG integration, while other questions are entirely ignored, even if they could soon become crucial. “Third-party research providers,” Rose mentions as an example, “offer clients ESG information which is used by investors to make decisions. The way data is collected can vary from personal contact with company executives and analysis to a simple questionnaire sent to the company. Irrespectively of how it was obtained, investors may rely on that data to highlight risks and opportunities, but also for screening, box-ticking or as a basis for engagement. Such reliance can imply a huge transfer of power into the hands of the data providers. This is not to say that they don’t procure a great service, but we need to consider that their power is growing beyond what they were originally designed to do. There needs to be a discussion about that issue before it becomes too big a risk.”

Picture © NordSIP

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