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Celebrating Sustainable finance (Part 1)

11 Jun 19
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Celebrating 10 year of Sustainable Finance track records in Geneva, Part 1, by Christian Kingombe, 28th of May 2019

The 21st week of the year 2019 turned out to be the hitherto most Sustainable Finance intensive week of the year in Geneva. 4IP Group attended four of these Sustainable Finance events, and even had to omit attending a fifth “Impact Investing awareness” event, on 21st of May, organized by Svetlana Baurens, CEO Switzerland & Co-founder of Galileo International Impact Investing Centre (Galileo IIIC), Zurich, Switzerland and newly elected Board member of the Swiss Impact Investing Association (SIIA), which 4IP recently joined. This review blog seeks to extract the key messages and recommendations from the following four events:

  • Foundation of Impact Hub Switzerland (on Monday, 13 May, 6pm – 9pm);
  • 10th Anniversary of Sustainable Finance Geneva (on Tuesday 21 May 2019, 6 pm. – 7.30 p.m.);
  • 10th edition of Geneva Forum for sustainable investment (on Thursday 23 May 2019, 8 a.m.- 5 p.m.);
  • finally Impact Investing Panel Discussion on an Emerging Investment Strategy (on Thursday 23 May 2019, 6.30 p.m. – 9 p.m.) [see part 2].

The Impact Hub Switzerland Association

Through invitation as a member of Impact Hub Geneva, 4IP Group (Dario Moroni, Patrick Fitzgerald and Christian Kingombe) attended the 13th of May celebration of The Impact Hub Switzerland association, which was founded earlier in the month of May 2019 by the five Swiss Impact Hubs with a total of seven locations in Basel, Bern, Geneva, Lausanne and Zurich. The newly founded umbrella organization «Impact Hub Switzerland» bundles the activities of all these five Swiss impact hubs and allows the hubs to launch nation-wide projects such as the incubation program Circular Economy Transition. This event was a great occasion to learn more about the promising impact activities of our fellow Impact Hub Geneva members.

10th Anniversary of Sustainable Finance Geneva

Through invitation as recent members of Sustainable Finance Geneva (SFG), 4IP Group (Christian Kingombe and Patrick Fitzgerald) attended an event held 21st of May at the Palais Eynard in the old town of Geneva to celebrate that it has already been 10 years whereby SFG is actively promoting sustainable finance in Geneva. In terms of substance the official programme consisted of just a few speeches by Mme Sandrine Salerno, Conseillère administrative, Ville de Genève, which was followed by three successive reflections on when, why and how SFG was founded riddled with a few anecdotes by respectively: Angela de Wolff, SFG Co-founder / member of executive committee & former President and considered one of the 10 brightest Swiss Sustainable Finance stars; Bertrand Gacon, Initiator and project leader for SwiSOX (Swiss Social Stock Exchange at SFG; and Fabio Sofia, President SFG, a pioneer role in the field of microfinance joining Symbiotics at inception. The event was really meant for networking and celebration and therefore didn’t bring new elements to our knowledge about sustainable finance except to see how the field and its Geneva membership has incrementally increased since September 2008, and most importantly putting faces to the many names we so often have read about, but hadn’t had the opportunity to talk to face-to-face.

10th edition of Geneva Forum for sustainable investment

4IP Group’s management team had decided to attend for the first time, since our own foundation in May 2017 and the amendment to our constitution in May 2019, The Geneva Forum for Sustainable Investment (GFSI). The GFSI is the annual meeting place in the field of Sustainable Investment (SI) organized by Voxia Communications and Conser at Kempinski Hotel Geneva for investors wishing to learn about best practices and access quality products and innovative concepts. The objectives of this meeting were:

  • to recall the international issues of corporate social responsibility (CSR), governance and the environment;
  • to promote Switzerland as an innovative place for sustainable finance in a context of increased competition;
  • to present the SRI products and services market to an audience of wealth management professionals;
  • Bring leaders in the field of responsible investment around a platform to present their management capabilities.

The one-day event was incredibly rich with its 18 successive time slots of which 6 were parallel workshops, thereby putting 4IP in the difficult position of having to choose between two otherwise relevant events for our own “sustainable investment” activities. Evidently, in order to limit the scope of this section, we shall only extract the most important key messages conveyed in those sessions which we from the 4IP perspective found most relevant for our followers and clients.

After the opening words by two familiar faces Angela de Wolff, Conser Invest et Fabio Sofia Sustainable Finance Geneva, Jean Laville, Conser Invest, provided an overview of Swiss Sustainable Finance (SSF), which apparently have 120 representative members. What he omitted to say is that the membership is CHF3,000 per year. On the 4th June SSF will release and present its annual state of Sustainable Finance in Switzerland study at Hotel Warwick (stay tuned for 4IP Group’s take on this study in a subsequent blog).

RDV institutionnel – Renforcement réglementaire ou autorégulation?

Mr. Laville in his contextualisation of the panel discussion highlighted that recently a citizen movement, Divest Vaud, asked the State Pension Fund (CPEV) to take into account the climate emergency. It has created an online platform where affiliates can demand that their fund divestment of fossil fuels. In its appeal to the CPEV, Divest Vaud calls for an investment strategy that respects the Paris Agreement on the climate. Divest Vaud is not the only group to have such claims. In Geneva, too, the State Provident Fund (CPEG) has been criticized for its slowness on the climate theme. “Instead of investing in green energy, the CPEG prefers to enter into a dialogue with fossil fuel companies,” said Thursday last week the Group of Insured Disinvestment in a statement.

This group, which brings together around a hundred CPEG policyholders, is calling for a decarbonisation of the portfolio, with the aim of reducing the carbon footprint by 50% by 2025.

To answer these accusations/pledges from the Swiss Pension fund members, SSF had invited Jean-Rémy Roulet, Président, ASIP and François Puricelli, Président, Groupement des institutions de prévoyance (CCB) to discuss whether the institutional investors should be subjected to strengthen regulation (e.g. EU Sustainable Finance directive) or whether they should instead be allowed to continue to auto-regulate themselves as hitherto.

The ASIP President started by emphasising that the pension funds have to adapt themselves to the members increased life expectancy. It would be wrong to lose the focus of its main mission which is to manage risks on top of numerous societal problems. The crucial concern as seen from his perspective is the lower return on investment and the aging population to a larger extent than thematic investments. Hence, it would be necessary for the members to be paying more in order to receive retirement for a longer period. Nevertheless, in the Swiss tradition he was willing to compromise in the Swiss tradition by committing his fund to contribute to addressing climate change challenges.

His fellow panellist, Francois Puricelli, emphasized that it was a question about how to manage the impact on environment, as illustrated through the case of Volkswagen. When it comes to the funds investment portfolio policy the situation is contradictory according to him. He emphasized that the real economy still is dependent on fossil fuel and that alternative energy sources were not going to be filling the gap anytime soon and imposing restrictive regulations would be counterproductive. Using the traditional negative screening approach as to whether or not to invest in publicly listed companies still has its limitations and constraining rules on pension funds would not help he argued.

Mr. Laville then asked what is preventing the pension funds from changing their investment strategy to which the panellist mentioned that each of Switzerland plus 1500 pension funds is responsible within a normative framework. As mentioned above the public pension funds are receiving a higher pressure from their members than the private pensions funds.

There was a consensus among the two pension funds that its better to engage in a dialogue with the oil companies rather than pursuing an aggressive constraining regulatory approach. The existing normative framework was considered largely sufficient by both panellists, because it provides performance, portfolio guidelines, fund management approach etc.

To illustrate their point, it was mentioned that to force the pension funds to support start-ups with a private equity fund financed from 1% of the assets of the 2nd pillar of around CHF650 Mn, was considered impossible to carry out. Too much constraints will lead to missing the target it was claimed. The problem being that legislation and directives do not evolve as fast as a dynamic society, and therefore the best advice they could give the competent Federal Authorities with regards to taking more sustainability risks was instead to let the Pension Funds do their job which is to ensure financial sustainability of the pension funds in the long run.

After this not so encouraging start to the SSF event the next plenary session focused on

The Virtue of Engagements: Catalysts for Shareowners,

which was given by Mary Jane McQuillen, Managing Director, Portfolio Manager, Head of Environmental, Social and Governance, Investment, ClearBridge Investments, filiale de Legg Mason Global AM. She talked about What ESG Investing is. She saw ESG as a fiduciary or risk mitigation approach. She highlighted a number (3) of ESG Integration Models about how to speak to institutional clients on how to know the difference of the actual approach to integrate ESG factors for long-term value versus green washing.

  • Model 1 (most common approach): Investment professionals – portfolio managers – fastest way – buy 3rd party research and put it over their own process.
  • Model 2 (two-part processes): Asset manager has investment professional asset managers on top and the internal ESG team focus on engagement and proxy voting. Overall, they work together as a team, however they are still separate entities. The ESG team doesn’t make the investment decisions.
  • Model 3: Every investment professional and portfolio manager is also the ESG specialist but not as a separate entity but instead part of the fundamental approach. They need to understand – the key ESG factors to carry out a proper ITC analysis, Food analysis, or a Utility analysis. The ESG is not going to be the same, instead it is a different valuation approach valuing a Bank, Telecom or a Food company. This should be done within one fundamental framework.

In other words, what makes ClearBridge Investments stand out is that they believe that all financial analysts also have to be an ESG analyst. The long-term investment analysis therefore also should go through the ESG analysis. ClearBridge then carries out an internal ESG rating of the asset managers. They believe that communication is important – everyone talks to each other about ESG factors – so any portfolio manager should understand the full picture of what the ESG factors.

Externally – analysts have a lot of experience, which need to be shared. This is done by speaking at large fora e.g. Institutional investors – about how to think about ESG integration and by sharing their experience.

When it comes to incentive & compensation – the portfolio manager scores the analysts on idea of communication and ESG analysis and where the value comes with regards to the stock valuation.

This compensation approach based on the review of the analyst – sends a strong signal that ESG is not a marketing exercise but an approach to analysis and carry out investment and that it is meant to support the analysts especially since engagement with companies takes time. In the past the Asset manager would meet with CEO/CIO and the ESG analysts would meet with the Head of sustainability. ClearBridge Investments believes that the most effective way is to have financial analyst also be the one asking about ESG targets, gender, executive compensation and governance, to bring the non-financial questions in front of the CEO / CIE not to the side as hitherto, since its important to these long-term strategic issues of importance to business evolution and growth. ClearBridge as an active manager has proved through this balanced and diversified approach what it takes to ensure consistent performance regardless of the macro-stability of the countries where they invest. ClearBridge is both competitive and outperforming the benchmark. So, this was a very good and more optimistic contribution to the GFSI event following the initial panel discussion with the two institutional investors.

The first parallel workshop session I followed was entitled:

Developing a Robust Approach to sustainable investment from theory to practice

This workshop was delivered by Sheila ter Laag, Spécialiste ESG BNP Paribas AM. She talked about BNP Paribas’ on-going huge transformation in terms of sustainability. Before this initiative only covered 10% of AUM which had highly sustainable social responsible investment (SRI) strategies, or thematic investment and some impact investing. The new objective is to go full sustainable with 400 Bn AUM with the mission of no longer separating mainstream investment from the greener / thematic investment approach. A new Sustainability Centre has been set-up as the Hub/think tank on investing sustainably for years, how to address the issues of climate change (CC), environment and using up natural resources. BNP Paribas now believes that it needs to have experts able to analyse these factors by looking at the carbon footprint and encouraging/transforming the companies to reduce these carbon footprints. The BNP Paribas team has increased from 10 to 24 over the past year which has enabled BNP Paribas to enhance its capability of carrying out these types of analysis through their climate expert, head of sustainable investment, consultant of Principle of Responsible Investment (PRI). This larger team enables BNP Paribas to study the effects of CC and resource exhaustion but also about the effects of engaging on a very high level – via stewardship with companies and regulators and those running markets and countries (cf. green bonds) in terms of what affects the real economy.

The BNP Paribas presenter also briefly addressed the three critical pre-conditions for a more sustainable economic system (that is driven by a low-carbon sustainable growth):

  • Energy transition
  • Environmental sustainability

On this background the present she emphasized that through the launching of the new 2019 Global Sustainability strategy aimed at getting the whole company on board that all asset classes managed by BNP Paribas will have integrated ESG criteria. Consequently, BNP Paribas has been ranked 1st in class by the PRI by walking the Talk – as a company – by being as good as the companies that BNP Paribas is investing in.

By June 2019 all BNP Paribas’ strategies for open-ended funds will have ESG integration.

She also mentioned that 40 Bn of thematic investment is expected to go deeper into ESG – transition funds. And the Climate Action 100+ – have institutional investors talking to the top GHG emitters around the world. While Investors can have a huge effect, she argued that we need other institutions to come on board to ensure that money is invested in a sustainable way. The presenter concluded by stating that the future makers should shape the world by creating value for clients through this type of ESG integration – thereby setting the standard for sustainable investment.

After these two initial plenary sessions the programme turned towards three successive parallel workshops. The first one which I chose to follow focused on “ESG investment, a performance factor in emerging equity markets”

WORKSHOP Salon Avenir: L’investissement ESG, facteur de performance sur les marchés actions émergentes

The speaker was David Czupryna, Responsable des portefeuilles clients ISR from the Candriam Investor Group who started by addressing: What ESG means for the performance? He believes that ESG can bring a value addition for the selection of stocks.

He then went on to talk about the challenges which Investors investing in EMEs are confronted with:

  • Transparency challenge – that is EME enterprises offer less info to the investors than their OECD counterparts when it comes e.g. to reliable accounting info – but also extra-financial data;
  • The environmental standards are less high than with their OECD based counterparts – e.g. because of the outsourcing to EMEs;
  • Corruption – especially because not all EME are democratic.

He went on to compare over 10 years the performance of the index MSCI EME Equities with the part of the index with ESG Coverage. This showed that there is an overperformance of the better emitters compared to the MSCI EME Equities.

  • Annual Return for the Top ESG Issuers is 7.3% compared to
  • MSCI EME Equities at 4.25%.

Using ESG filters has brought financial value to the investors. There is no selection of stocks it’s a selection based on ESG factors only. Out of 794 he showed that 344 are amongst the best issuers.

At the sectoral level ESG brought value to all sectors except two, especially the energy sector with positive value: Carbon based electricity and Renewable energy.

Its interesting to note that Candriam has a team of 12 ESG analysts, which contrary to BNP Paribas still is separate from the portfolio management team. They follow the so-called above mentioned Model 2, that is buy and use external ESG research, but the analytical model is home-grown (internally) by Candriam. Moreover, Candriam doesn’t use the same ESG approach to an EU portfolio with higher standards compared to a portfolio based on EMEs. Candriam systematically remove the most controversial enterprises when it comes to abuse of labour right – because they have been known for either of the following controversies:

  • Corruption risk
  • Respect of labour rights
  • Human rights standards
  • Environmental risk

Candriam excludes the following controversial activities: Weapon; Gambling; Alcohol (targeting minors); and Tobacco.

What I found interesting was the finding that if the enterprises is downgraded by ESG analysts what you see is that the enterprises on average underperform after 12 months. He argued that ESG can enable us to anticipate certain tendencies, because of the controversies which will affect the stock price of the affected enterprise. The ESG analysis is a norms-based filter of controversial activities, encompassing: Analysis of governance (e.g. screening how company’s structure with regards to shareholders, internal control, the members of the board etc.); Sustainability themes optimisation which gives an Overall ESG added value [the sum of these 4 pillars].

In conclusion – over the past 10 years the ESG approach generates 2.4% p.a. outperformance in excess over 10 years compared to the benchmark with a similar risk. Most of the ESG selection themes (Norms Based, Controversial, Sustainability themes) have had a positive added value to performance. The ESG analysis allows to select value that brings Alpha, but also provides prediction of the performance versus the market benchmark.

WORKSHOP Salon Avenir: Comment concilier produit structuré et dimension caritative?

The presentation by the speakers Jean-Christophe Jouannais, Ingénieur Produits Structurés and Claire Douchy, Responsable de l’offre «sustainable & positive investments» both from Société Générale Private Banking Suisse didn’t provide any value added to 4IP Group’s business plan related activities, so I won’t dwell on the content of their presentation here.

 

LEAD CONFERENCE : Décarboner les portefeuilles ou investir dans et pour une économie décarbonée?

The speaker Hervé Guez, Directeur de la recherche & Gestion actions et taux at Mirova countered the previous Candriam Investor Group presentation by stating that ESG filters doesn’t necessarily always lead to superior performance due to long-term challenges. He raised the caveat that you need minimum a 3-5 years of investment horizon to capture the environmental innovation.

He mentioned that traditional indices have a higher carbon footprint than the real economy. He also argued for the objective to have a more resilient economy in order to obtain a higher return in the long-term. He concluded that the goal is to find alternative solutions via innovation to reduce the carbon footprint.

Défis actuels de la politique de placements: une perspective de banque centrale

The speaker Andréa M. Maechler, Membre de la Direction Générale, Banque nationale suisse (BNS), talked about the BNS as a big investor with a big balance sheet of CHF750 Bn to manage, which constitutes around 15% of Switzerland’s GDP. Money on the balance sheets has to be invested abroad, and BNS can’t hedge using the currency / exchange rate risk. Moreover, BNS focuses on the liquid markets e.g. EURO, but also the JPN (Asia). While BNS mostly focus on obligations/bonds, 20% of the balance sheet – CHF140 Bn is invested in stocks:

  • 2005-12 – 1,500 stocks;
  • After 2013 – 5,500 stocks – including in Nordic countries;
  • After 2015 – 6,500 stocks (companies) – including A-Shares in Shanghai.

The challenge is that each country has its own rules and constraints, e.g. In Mexico can’t invest in ITC / Telecom.

In order to avoid conflict of interest as a central bank – no stock picking is allowed, but instead BNS follows a more passive approach / management, and BNS only uses the exclusion approach.

BNS’s Mandate – is not to optimize the return on investment but to lead a good monetary policy to ensure price stability and good foundation for the swiss economy.

She mentioned that green bonds – when changing the monetary policy – needs to remain market neutral – to avoid negative effects.

After her keynote speech, Ms. Maechler, joined what seen through the prism of 4IP Group was the most interesting panel discussion of the SSF event:

TABLE RONDE – Le financement de la transition verte

The roundtable was moderated by Angela de Wolff, Founding Partner, Conser, and the panellists were:

John Tidmarsh, Chief Investment Officer, R20 investing in reneweable/sustainable infrastructure;

Jos Verbeek, Manager and Special Representative to the UN and WTO, World Bank Group;

Olivier Kobel, responsable du financement et du développement, Helvetia Environnement.

Jos Verbeek started by pointing out the need of around 4.5 Trillion USD p.a. to finance the SDGs, while at the same time official development assistance (ODA) only is capable of mobilizing around 200 Billion USD yearly to fund the SDGs in the Developing Countries (DCs). In other words, a shift in mindset is required from the IFIs (e.g. WBG, AfDB, EBRD) to shift away from financing projects themselves (USD 100 Bn) towards starting to leverage and facilitate resources from the private sector to help finance development projects. Consequently, the new WBG strategy aims to bring the whole WBG together. The WBG was previously known for WBG lending money to Governments (member states); IFC investing in the Private Sector (that is private sector-to-Private Sector) and MIGA helping to provide guarantees against political risks to private investors. The new approach aims to bring all these approaches together to help countries find investors willing to invest in green-related opportunities. According to IFC calculations 20 EMEs alone is in need of USD23 Trillion in investment. Hence, the way forward would be:

  • WBG (IDA & IBRD) – to ensure regulation that is conducive to investment and business;
  • IFC – to bring the private sector to these EMEs;
  • MIGA – to ensure the private sector doesn’t carry all the risk.

As an example of this, Mr. Verbeek mentioned that in July 2015, Zambia’s Industrial Development Corporation (IDC) signed an agreement with IFC to explore development of two large-scale (100 MW) solar projects through Scaling Solar. The competitive auction organized through the program attracted 48 solar power developers, seven of whom submitted final proposals, and the bids yielded the lowest solar power tariffs in Africa to date equivalent to 6 U.S. cents per kilowatt.

IFC and the Government of Canada are providing approximately $25 million in financing for the second Scaling Solar project under development in Zambia, allowing construction to start on a solar plant that will provide clean and affordable power to ease the country’s energy shortages. The financing package arranged by IFC includes senior loans of up to $10 million from IFC and up to $12 million from the IFC-Canada Climate Change Program, plus $2.5 million in interest-rate swaps from IFC and a $2.8 million partial risk guarantee from the World Bank’s International Development Agency. The European Investment Bank is also providing $11.75 million in loans to the project that will be built near the capital Lusaka by Enel.

IFC is also trying to set the market – because the impact investors are willing to buy and to set the standards for Green bonds. The WBG believes that there are resources out there sitting in negative interest rate and bonds – waiting to get the money out of there and into the EMEs.

R20 Foundation to support regions to get into the green transition

John Tidmarsh started his intervention by stating that the biggest problem is that there is not enough bankable projects and that we therefore need to try to make the market larger and more liquid. The R20 – Regions of Climate Action is a not-for-profit international organization founded in 2011 by former Governor of California Arnold Schwarzenegger in cooperation with a number of leading regions and NGO’s, the United Nations, Development Banks, Clean-Tech companies, and Academia. Its mission is to accelerate sub-national infrastructure investments in the green economy to meaningfully contribute to the SDGs and advance the COP21 via bankable infrastructure project and to match these pipelines with investors. R20 aims to create partnership with fund managers, hopefully in time also with 4IP Group’s first fund, that creates funds dedicated to this deal flow. Consequently, R20 then share the management fee, which contribute to the establishment of the pipelines. R20 ensures that the projects are both green and attractive to investors while improving lives and helping to deliver the SDGs.

R20 believes that the sub-national level is important – because this is where the greatest opportunities are with regards to achieving impact. But it is also where the greatest demand is and where infrastructure delivery is needed the most. This is the type of infrastructure which is smaller than what is typically funded by the WBG.

R20 therefore works with local governments (LGs) e.g. – a city, a province or a state – below the Central Government (CG) level – while being fully aligned with CG’s infrastructure masterplan. R20 also believes that the LG has the greatest vested interest to help manage project risk.

John Tidmarsh ended his presentation by highlighting R20’s USD 88 Mn Flagship project – 50 MW Solar PV Power Plant project, which represents 10% of the capacity to deliver energy in Mali. Kita is a photovoltaic project with a capacity of 50 MW that was initiated in February 2013 by the signature of a Memorandum of Understanding between R20 and the Government of Mali to carry out pre-feasibility studies on renewable energy projects in the country. Initial public and private investors were attracted and, thanks to the feasibility studies, a PPA and concession agreement were signed, enabling the construction of the power plant to begin in early 2019. Once built, Kita will be the largest PV plant to date in Western Africa.

Helvetia Environnement, National Leader in Waste Management

Finally, Olivier Kobel presented the first company in Switzerland to do a Green bond. In 2017 Geneva distinguished itself in the field of sustainable finance in Switzerland, by issuing two green bonds in the space of a few months. The two “green” loans were the first made in francs by a Swiss company and public authority. The European Investment Bank (EIB) acted as a forerunner by issuing in 2014 the very first green bond on Swiss territory. In the first case, the Geneva-based company Helvetia Environnement, which specializes in waste treatment and recycling, raised CHF 75 million in June 2017, with a maturity of 2022 due to an important capital (CapExp) requirement for waste management and recycling. In November, the State of Geneva issued a green bond in two tranches. for a total of CHF 420 million over a period of 10 and 14 years.

The advantage of this financing option was that it allowed Helvetia Environment to signal and to provide a sustainability commitment of company and position it with stakeholders as well as communicate it to the wider public. Investors rushed on these offers, allowing issuers to negotiate a better coupon.

Helvetia Environnement used the funds to develop its sustainable development business, mainly to buy the SRS company. The rest was used to build an automated sorting center. For Olivier Kobel, head of financing and development at Helvetia Environnement, the “green bond” was self-evident. “Previously, we used capital increases and structured bank loans, which was not ideal for the group.” These solutions present high costs and a lack of flexibility, according to the leader. The green bond option was considered both a good idea and easy to implement. Despite this success Swiss corporates didn’t follow Helvetia’s lead because they were worried about bureaucracy. But while there of course is both Due Dilligence and certification (not too much hassle) according to Mr. Kobel its just business as usual.

After the lunch networking break the next plenary session was focusing on:

LEAD CONFERENCE: Responsible Investing and the SDGs

The presentation was done by Nick Henderson, Gestionnaire de fonds dans l’équipe Responsible Global Equities, BMO GAM who e.g. praised the SDGs in providing a comprehensive – well rounded – framework around the sustainability issues. BMO use their own framework to clients – in order to disclosure how they are investing.

He discussed how we can drive improvement in businesses and encourage them to take on board SDG criteria risk and opportunities – through engagement. He e.g. provided historical data – from a 3rd party analysis of where engagement has worked and what the returns are. Whether it’s a question of causation or correlation it’s a fact that the linkage between successful engagement through 10 years of data – actually works – especially if you work with companies collaboratively, this can drive some improvements.

Who this is done is by driving down the SDGs and the targets and engage with companies. For BMO GAM 80 targets are engageable. They then build strategies – looking for quality businesses allocating capital efficiently. They look for where can drive engagement – see tangible evidence that there are results from successful engagements

In terms of how to engage along the lines of SDGs, they focus on:

  • The Independence of the board
  • Whether the Co-chairman and CEO role coincides or is a split role

Following the above-mentioned model 2, BMO has its own inhouse specialists in the ESG, of which 16 specialists are looking at SRI and if they have a good track record and corporate access. If the company do not have good SDG linkage, then BMO does not have a place for it in its strategy with investment aligned with SDG target as pre-condition for investment. Investors want to see financial return, but also the non-financial return and the ability to identify and measure impact.

The 16 team members have achieved success in terms of the number of companies engaged, e.g. in 2018 – they engaged 600 companies of which 240 are having success in this regard e.g. by providing clarity on what its doing for SRI.

Apparently, there is currently a real demand for explicit engagement activities to make companies better which allows BMO to provide to their clients the desire to align financial decision making with their own values. They want as broad a spectrum of impact as possible.

This plenary sessions was then followed by three successive parallel workshops. The first one was on

WORKSHOP Salon Durable: Innovation: l’investissement responsable rendu puissant

The presenters were Mélanie Schaus, Product specialist, Alexander Roose, Head of International Equities Sustainable Strategies of Degroof Petercam AM, which is an active fund manager based on research (bottom-up) investor convinced in strategies based on 3 objectives: (1) it does not invest in companies not respecting fundamental labour rights; nor in companies activities considered controversial; but instead they invest in companies showing best practices and best effort in their sector. These companies are ranked / scored and compared. The scorecards allows them to compete with each other based on quantitative score and ESG scores.

One could plausibly say that this investor also falls within model two above. Its Investment process is based on a Team of researcher (equity & fixed income), a SRI team and they also rely on extern resources in the form of – Sustainalitics and debt brokers. Management could ask to elaborate a sustainable investment process based on ESG.

The environmental risks are taken into account when looking at companies meaning that e.g. Monsanto is not eligible to sustainable funds. On the other hand, it invests in innovative companies that can address challenges such as carbon footprint, that is it invest in positive impact companies.

Degroof Petercam AM is a signatory of the UNPRI. The turnover of the funds is between 3-5 years and they provide a trimestriel screening because they believe that its not possible to manage a sustainable fund with frequent entry and exits!

WORKSHOP Salon Durable: De la responsabilité à l’impact avec le modèle ABA

The presentator was Léa Dunand-Chatellet, Directrice du Pôle «Investissement Responsable» from DNCA Investments who interesting has chosen an approach which is not to be a blackbox in the sense that they believe that the methodology of their portfolio management should be as transparent as possible! Their Philosophy is to manage the risk and understand companies’ future and whether it is positioned well towards the challenges in next 5-15 years.

DNCA Investments’ ABA framework has 4 axes in the analysis:

  • Responsibility of the shareholders
  • Environmental responsibility
  • S1 – Social – Human Resources (30% of costs of enterprises)
  • S2 – Society – all the challenges external of the company (90% of issues related to corruption, human rights etc. new indicators)

In total the ABA framework has 24 indicators – and they only use those indicators which are material. Thus, DNCA Investments’ has chosen a Transparent model, which disclose the reasons for the notation. The framework is being used to communicate with the public (adapted by company).

Their analysis is dedicated to the measurement of impact in the form of:

  • Additionality
  • Intentionality
  • Measurability

Whereby they look for relevant indicators and the data of the enterprise to measure the impact. They have talked to 50 enterprises – and used 40+ indicators, covering Health, Food, ecological challenges etc. to identify to what extent the strategy goes in the direction of impact, or how the company’s products and/or services will provide additionality compared to the norms and regulation. They also look at Indicators on the best performing enterprises with regards to carbon footprint; the Culture of the company – e.g. suicide rate, the line of hierarchy given the fact that it takes years to transform the culture of company. The 40 enterprises in their portfolio – they only looks for those with positive impact.

WORKSHOP Salon Durable: Sustainability as an investment strategy

The présenter was Hamish Chamberlayne, Responsable des investissements socialement responsables from Janus Henderson Investors who argues that sustainability makes good business sense and good investment sense. However, he mentioned that the SDGs don’t spend much time talking about the negative – in terms of which other companies are contributing to negative sustainability. To illustrate his point, he made reference to Exxon Mobile’s so-called “Annual sustainability Report,” in which Exxon claims to contribute to 8 SDGs, including SDG13 Climate Action. From this the presenter underlined that there is a need to have clearly redlines and thresholds to exclude e.g. tobacco and oil companies with sustainability reports!

In 1991 Janus Henderson Investors launched a low carbon global equity strategy, which is more than not investing in fossil fuel. They are investing in solution providers related to The age of disruption through two generational investment trends:

  • Low carbon energy transition – the digitalisation of energy
  • The fourth industrial revolution

Which they believe eventually will supersede the existing geopolitical environment – by transcending global politics and economics.

Hence, Janus Henderson Investors are investing in world leading companies finding the best companies in each sector, globally recognized names, not an isolated investment universe. They believe its important to invest in big businesses – to make a real difference. The believe firmly that sustainability is a winning investment strategy which is outperforming the conventional indices. They have done so by e.g. analysing every company looking at both qualitative and quantitative targets allocated to one of the 167 targets of the SDGs in order to show how their portfolio contributes to all of the UN SDGs.

The last of the afternoon parallel workshop which I attended was focusing on:

WORKSHOP Salon Avenir: Impact investing in Fixed Income

The présenter was Ominder Dhillon, Responsable international de la distribution institutionnelle from M&G Investments, which has 303 people working in the finance investment team using a long-term bottom up approach. As with BNP Paribas, they believe its important that their Credit analysts fully understand the ESG issues within each sector they are covering, that is an in-depth understanding covering all the angles financial as well as ESG for any particular investment. In other words, they also analyse the non-financial factors – the effects.

The presenter believes that Impact Investing is easier to implement in an equity context – where the equity investor has a vote and seat on the board and therefore more influence on what going on in that particular company. This allows the investor to play active part of the industry in contributing to the debate at the policy level.

The debt / fixed income investor could instead be part of various working groups around e.g. Hydropower and renewable energy, which is usually initiatives going on for a number of years. M&G Investments has for example invested 20 Bn £ in debt in social housing, green transportation, education etc.

Following above mentioned model 2, the analysts also work with external partners like Sustainalytics to support and challenge the research by investment analysts.

When it comes to Public debt – financial return, diversified portfolio – measurability of impact is more difficult!

However, value creation is an integral part of Impact Investing’s balance between return and impact.

Ominder Dhillon warned not to overpay for the positive impact effects that these investments can have. In fact, overpaying for the positive impact is becoming an increasing risk, and the presenter there suggested the need to be very selective. The presenter also talked about the challenge of green bond which is recommended to be used selectively.

When it comes to using private debt for impact investing M&G Investments look for putting in place something that generates some positive outcomes socially or environmentally, and that wouldn’t have happened except for the impact investment. They endeavour to set thresholds at right level e.g. look at proportion of students in accommodation from less privileged background.

The also develop Measures to show clients that money/capital is having impact that they want to happen such as Environmental impact: Green House Gas (GHG) emission avoided.

They are matching their investment themes to the SDGs – which they consider as a helpful framework to put portfolio against this framework. In fact, the SDG builds into a theme for impact investing.

In conclusion, overall, it was well worth spending the whole day at the Geneva Forum for Sustainable Investment in the company of 4IP Group’s peers. A lot of best practice methods, approaches, measures, concepts, trends and perspectives to absorb in one breath. We have tried to digest them and capture some of the most important ones in this extensive blog post and welcome any feedback or wishes to engage or collaborate with 4IP Group or those who wish to show case their experience in our forthcoming Impact Investing Book project in collaboration with researchers at the Graduate Institute Geneva.

 

Part two of the review of the two 10 Year celebration events will feature the SECA Impact Investing event and GRFI’s 10 year celebration.

 

 

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