ESG to Transition to Real World Impact
BNP Paribas Asset Management expects environmental, social and governance investing to shift to measuring the real world impact of these strategies.
Alexander Bernhardt, global head of sustainability research at BNP Paribas Asset Management, said at a media briefing on 20 October in New York that the investment industry is between a rock and a hard place with regards to ESG. Some critics have accused asset managers of greenwashing while some states in the US have pulled mandates from firms who they accuse of boycotting oil and gas.
Bernhardt explained that the move towards ESG was an attempt to mainstream and underscore the importance of ESG analysis to financial and performance-related outcomes. As each investment manager implements ESG in a different way it is important to pay attention to the variety of implementation methods
“After 15 years of practice and thousands of research papers we have seen that there are many ways to integrate ESG into a portfolio and, by and large, the performance impact has been positive,” he added. “However, it’s not a guarantee.”
Although performance has been positive, Bernhardt said ESG needs to measure its impact on the real economy and how it influences capital allocation in equity and debt markets.
“Real economy outcomes are relatively hard to ascertain, so I think the emphasis is going to shift more towards investing for impact,” he added.
One way to measure impact is to look at a portfolio’s allocation to SDGs – the 17 Sustainable Development Goals set by the United Nations.
In June 2022 BNP Paribas Asset Management and Matter, a Danish fintech, announced the launch of SDG Fundamentals. The new dataset enables investors to analyse the extent to which company revenues are aligned, or misaligned, with the targets of the SDGs according to a proprietary taxonomy.
Bérénice Lasfargues, sustainability integration lead at BNPP AM, said in a statement at the time that contribution to real-world sustainable outcomes is the next frontier of sustainability analysis.
Lasfargues added: “While this type of analysis continues to be hampered by a lack of granular and standardised corporate sustainability disclosures and data, our methodological work with Matter helps to break down this barrier and provides investors with actionable information on what constitutes company alignment to the targets underpinning the 17 SDG Goals. It is also part of a wider push towards increased data breadth, quality and standards through industry collaboration.”
In addition, Bernhardt stressed that stewardship is increasingly important as investors use their voices to influence outcomes at a corporate level. For example, BNP Paribas Asset Management has filed shareholder resolutions for US energy companies to disclose their lobbying expenditures.
“That information is really important for investors to make decisions and, I think, can have an effect on outcomes in the real world,” added Bernhardt.
Bernhardt also highlighted increasing regulation such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR) which is implemented from January 2023; proposed climate-related disclosures from the US Securities and Exchange Commission; and the move to Net Zero.
“Governments representing 90% of global GDP and more than 500 financial institutions have committed to Net Zero and represent trillions of dollars,” said Bernhardt.
Vincent Nichols, senior investment specialist, US & global thematic equities, said at the briefing that towards the end of last year, the Federal Reserve was forecasting rate hikes of between 25 and 50 basis points in 2022, but that changed considerably due to inflation.
“The more aggressive pivot has been a significant headwind to equity and fixed income markets,” Nichols added. “Bonds have sold off at a very rapid pace and yields are rising at a similar rapid pace.”
However, he argued that US equity valuations are starting to look more attractive, so there is reason to be optimistic going forward.
One of the themes for the asset manager is innovation, as it looks for companies that are rapidly innovating and taking share from competitors failing to adapt.
“For the first time in a long time you can find good valuation for those types of businesses,” he added. “The software industry, in particular, is looking very cheap compared to historic averages.”
In addition, despite the economic slowdown, chief executives are still expecting to spend money on technology such as data centers and software upgrades through 2023. Nichols also highlighted opportunities in healthcare innovation and small caps.