ESG – From Tie Breaker to Deal Breaker

    Stockholm (NordSIP) – “What is important to understand regarding how a company generates alpha is not what they are doing but how they are doing it,” said Jessica Ground, Head of Sustainability at Schroders during a recent chat with NordSIP on the margins of the asset manager’s recent European ESG Media Conference in London. “Integrating ESG into financial analysis can generate alpha and better risk-adjusted returns,” she explains.

    Schroders does this in three different ways according to its Sustainability Accreditation scheme, which divides funds into “screened”, “integrated” and “sustainable”. The first two categories are quite self-explanatory, but the third is where Schroders classifies impact investments such as its Global Sustainable Growth, Global Climate Change or its Sustainable Multi Factor Equity strategies.

    According to the Head of Sustainability, these impact investments is where the additionality can be found. “We would probably call additionality impact and we have taken quite a pure definition of that. Those are assets that are targeting a financial and a social return. They are probably more suited for the private space. We focus on impact and look for measurable and targeted opportunities.”

    With regards to the oft-mentioned connection between impact and the UN Sustainable Development Goals (SDGs), Ground takes a more tempered approach. “Investment has a role to play on SDGs but it is really more about a systematic change. We can track the progress we are making across several SDGs and the relevant underlying variables. However, it is important to be focused and mindful. Companies like to focus on the good things that they do and don’t like to talk about their negative impact. We have seen a lot of listed equity SDG funds and we are a little bit cautious of those.” she says. “The SDGs are much bigger than just investments. They are for countries and for all of us to make progress on. Clearly, there is a role for private investment to contribute but if you look at the underlying target, governments equally have a role.”

    Ground agrees that impact investing is gaining momentum. “It is. We have to be honest and acknowledge that we are starting from a low base but there is strong demand.” But again, transparency is crucial for the Head of Sustainability. “The trajectory of the world towards sustainability is not going to be straight. In our sustainable funds, which focus on impact investments, we warn investors that the performance is the same but that over five years there might be more volatility.”

    The fourth sustainable investment approach that Schroders follows is engagement, which Ground and Charles Somers, global equities portfolio manager, discussed in a separate presentation during the course of the conference. “I hope what came across today is that it is not just me – the ESG person – talking about engagement. It’s Charles and his colleagues. As you saw, he was completely fluent in our Sustainability Quotient (SQ) framework and in control of all the details of the CSL case study,” she explains. SQ is the proprietary assessment of sustainability that Schroders uses for engagement purposes, which Somers used to facilitate a dialogue with CSL about employee satisfaction. “We focus on active ownership because targeted engagement improves investment outcomes.”

    SQ was one of a range of proprietary data and analytical tools discussed by Schroders throughout the conference. “One of the main reasons we have been investing in our own in-house tools is because there is a lack of correlation between ESG data providers. There is also a lot of factor bias. If you are a large company you are likely to get a better grade.” While in-house tools had clarity and reliability, the creation of these tools has required a substantial investment. “CONTEXT, one of the systems that we have developed has been two years in the making. Our primary focus as a business is to help our clients meet their investment goals. We are investing in these systems because they provide us with clear investment insights.”

    A salient absence from the day’s presentations was the fixed income market, be it green bonds, sustainability bonds or social bonds. “We monitor these things quite carefully. I’ll be honest: we stepped back from the green bond market. We will look at individual issues but we have some concerns about the use of proceeds.”

    Going forward, Ground has three priorities. “We have put out a white paper on governance that I looked forward to exploring both internally and externally. I’m worried that we are just asking companies to do more and more, whereas if you are on the board of directors, a bit of clarity is what is important.” On the data front, “we will probably focus more on SustainEX as a way to evaluate the positives and the negatives for companies,” she says, referring to Schroders tool that attempts to measure the unaccounted externalities companies impose on the societies they operate. “When it comes to products, I’m really interested in thinking about what this multi-asset strategy from Leslie-Ann means”, she says pointing towards the insight that an increase in the sustainability of multi-asset portfolios appear to increase risk.

    Ground is confident of the increased demand for ESG and its prominence in investors’ minds. “Originally, ESG was a tie-breaker. When an investor had to choose between two asset managers, ESG might tip the balance in favour of the one that did it. However, nowadays it is a deal breaker. If you do not have ESG, some investors won’t even meet with you,” she concludes.


    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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