Bruno Servant: It is a game-changer for the industry and clients. ESG is a rich, complex, and diverse universe, you can discuss each indicator in detail about the quality, methodology and reliability of data. All our activities, investments, research, risk, and client relationship need to consider.
"The engagement approach can foster change in the economy as all
sectors are now in the scope of sustainability and ESG integration."
Our ESG approach has several pillars. We start with defining the methodologies and building the platform: concerning data, we work to continuously assess data robustness and reliability through cross-checks and increase the coverage and the frequency of updates. We have to cover thousands of positions, so we review ESG data inputs on an ongoing basis. We rely on external sources, but we also need internal tools and assessment capacity. In some cases, we need to assess and challenge the methodologies applied by other data providers with whom we have established an active and constructive dialogue.
We also have an exclusion policy, and we can implement the ones of our clients for dedicated portfolios. We tend to favour engagement over exclusions. This is because the engagement approach can foster change in the economy as all sectors are now in the scope of sustainability and ESG integration, ultimately preserving the value of our forward-looking investments.
After exclusions, we have the positive screening. We need the methodology, tools, and analysis to integrate ESG factors into the investment and research process. This is key as it creates opportunities, allows for better assess sustainability risks, and challenges some issuers and sectors have to face, but also opportunities.
For credit, our credit analysts and ESG analysts have developed ESG materiality matrices for each corporate sector. The matrices capture those ESG factors which may affect the credit rating of the investees, thus enriching our credit assessment capabilities. In parallel, this is complemented by thematic research on main ESG topics.
We have defined our methodology to assess green, social, and sustainable-liked bonds, beyond official labels and we regularly reassess the frameworks. We think our proprietary filter put us in a stronger position to avoid greenwashing risks.
We are also developing qualitative and quantitative tools to tackle climate risks and assist clients in the definition and achievement of their decarbonisation targets.
ESG integration has an impact on the whole organisation. All departments must do their part in synergy to implement all the changes required by the ESG strategy and regulation.
The industry is getting also more aware of what it means in terms of product management and reporting requirements. We have to adapt depending on client needs. Keeping up with regulation is an ongoing challenge because you have to see how you apply it and what it means for clients.
"The challenge is to avoid greenwashing and controversy risk, which is why you
have to be careful when using external data or research."
The industry must also contribute to defining ESG data and scoring methodologies. We need to know what kind of data we are using. Is it a pure number that is already public? Is there a specific methodology by the data provider we have to root out to make sure it is in line with our views?
The challenge is to avoid greenwashing and controversy risk, which is why you have to be careful when using external data or research. This is why for green bonds we have an internal methodology to make sure they comply with our criteria. Artificial intelligence can also help to detect weak signals or potential controversies.
ESG and sustainability are a new way to engage with clients. Most of them are eager to see what we can do for them and how we do it. On the pure valuation side, it is a positive because you cannot assess a company without factoring in all the ESG considerations.
ESG also brings a new dimension to our dialogue with companies we invest in - some sectors will benefit; others will have to evolve significantly. This means engaging on topics with companies that we did not beforehand.
Antonio Cavarero: From a portfolio management perspective, we are adding ESG metrics to the portfolio construction process adding them to financial, capital and risk metrics.
On ESG metrics, we know that they are not static in the same way credit ratings are not static. ESG ratings are an additional dimension that enters in the optimisation process. On top of that, you can engage with companies and incentivise them to embrace certain behaviours or projects to fulfil their ESG targets, adding a brand-new activity to the portfolio management.
Bruno: We have clients who are advanced and who have been Socially Responsible Investing (SRI) and ESG-driven for years. They see the whole marketplace and know what they want to do and ask if we can implement their policy in portfolio management. Then you have clients in between and clients who are becoming more aware. But things change quickly as we had some clients a year ago who were not so aware. Now, thanks to us, the regulation, and the external landscape, they have become more conscious and ask if we can deliver and want us to show them the numbers and the comments for ESG reporting, which they need regularly. Currently, we see ESG integration as a first step, quickly followed by the need to measure impact.
"Our staff is keen to work on this because ESG is a
corporate value, not just a duty."
This has a major impact on us because we have to deliver on all sides and need to see what areas will be a part of our management agreements with the clients. There is the cost of setting up the platform, buying the data, and producing the reports. and having more people working on this. We have to comply with the regulation and help our clients comply with their regulations and the expectations of their stakeholders.
Our staff is keen to work on this because ESG is a corporate value, not just a duty. They are happy to work in a company that is embracing these topics. That is good in terms of people engagement. The industry is now committed to ESG: our clients have taken commitments, and we have too.
You also have to consider the next ESG topics everybody will be focusing on. We frequently speak about biodiversity, for which regulations already exist. Biodiversity supports everything in nature that we need to survive - food, clean water, medicine, and shelter - and we have to see how topics like this impacts our investment decision. We can also look at companies' approaches to social issues and human rights, which was the initial big topic.
Vincent Chaigneau: The top priority is to deal with regulatory needs and client requests. The actual integration in the fields is an ongoing process.
"If you look at the historic cost of external research and the cost of ESG data,
that latter component has increased sharply."
The strategic asset allocation of the group will need to integrate some climate scenarios, so you need to build that expertise in the company or get some external support.
We are looking at thematic research, with both macro and credit research being involved. Credit analysts are focused on materiality matrices for sectors, and how companies score on those selected indicators. If you look at the historic cost of external research and the cost of ESG data, that latter component has increased sharply. It is a wild west out there, and investors need to make sure that they pay the right price for the data and the methodology. There is a lot of data that you might want to pay for, but some providers merely recycle data that is in the public domain. This is something that also requires some attention - how to watch that cost, keep it under control and make sure that scarce resources are properly allocated.
