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Everyone’s talking about responsible investing. But they frequently – and perhaps rather repetitively – claim a moral high ground that can suddenly turn you from being a recycling enthusiast, who doesn’t smoke, never takes a bath and drives a hybrid car, into someone who wants to indulge in smoking, take a full-to-the-brim bath or worse still, mix glass and plastic in your green waste bin!

Work in progress!

Many asset management companies stress the point that sustainable investment is not something they have embarked on recently – they have a wealth of experience in the area. But does this matter given that the United Nations defined its sustainable development goals (SDGs) in 2015, the same year as COP 21, with its landmark ambitions for a sustainable low-carbon future?

Although precisely measuring and publishing data on companies’ sustainable operating methods is far from easy, reporting initiatives are being established. Carbon reporting, which quantifies a company’s direct and indirect greenhouse gas emissions, is one of the most advanced. And it is being increasingly introduced by companies. On the other hand, reporting remains a tall order when it comes to providing evidence of the idea of a circular economy, which describes a more sustainable economic model by limiting consumption and waste of resources (water, energy, raw materials) as well as the production of waste. This idea is embodied in the creation of virtuous circles in which materials and energy are continually re-injected. Similarly, this is only the first year that France-based companies with over 250 employees are required to publish an index, founded on five criteria, which measures the steps taken to establish gender equality among their staff. Meanwhile, the rating agencies, specialists in the analysis of environmental, social and governance (ESG) data, do not always agree when it comes to awarding a rating to a company. This divergence can undermine their effectiveness and weaken confidence in them but can in views also have a reassuring side – the fact that there is no rigid code. For now at least. So, however much experience they have, when it comes to responsible investing, asset management companies are having to transform and intensify their practices.

Action rather than perfection

It’s a long and winding road and some of the bends need to be approached with care. Along the way there are muddy patches – like greenwashing – to be avoided as far as possible especially as they can tarnish the credibility of everyone involved. But there are also heartening areas where tangible progress can be made because determination pays. At COP 25 last december, no fewer than 631 institutional investors managing more than $37 trillion in assets urged governments to step up efforts to tackle the global climate crisis. This is one of the biggest alliances of financiers so far to raise awareness of global warming. They are calling on governments to adopt the consistent climate reporting developed by the Task Force on Climate-related Financial Disclosures (TCFD) (source: Novethics website 9/12/2019). Companies are also taking their own steps. Under the Science Based Targets (SBT) initiative launched in 2015 by the CDP (Carbon Disclosure Project), WWF, WRI and the United Nations, 285 companies have set greenhouse gas emissions reduction targets to align themselves with the recommendations of the GIEC. Every year, these 285 companies combined emit 752 million tonnes of CO2 equivalent, which is more than the cumulative annual emissions of France and Spain. Cutting their emissions by 35% would equate to closing down 68 coal-fired power plants (source: Les Echos, 6/12/19).

The long and winding nature of the road must be systematically highlighted as the end-clients are no fools. They look at the companies included in a ‘sustainable’ portfolio and often question what they see. That’s as it should be. It is important to be clear and take time to explain that sustainable finance does not mean perfect companies. Things are never black and white. Clearly, the rationale for Amazon being in the portfolio of a thematic fund on energy transition is not immediately obvious. Yet Amazon is aiming to achieve the targets set by the Paris climate agreement 10 years early (in 2040), starting with the promise of using 100% renewable energy by 2030, then reaching carbon neutrality by 2040. In practical terms, this will mean investing $440 million to create a fleet of 100,000 electric vehicles, saving the emission of 4 million tonnes of carbon gas. Similarly, the inclusion of Danone could be questioned. The fact that the company sells water in plastic bottles is not in dispute. But Danone is not only about bottles of Evian or Volvic, and thanks to its emblematic CEO, Emmanuel Faber, the company can boast solid CSR (corporate social responsibility) credentials. Danone is aiming to achieve carbon neutrality by 2050 and has already reduced its carbon footprint by 15.6% through the use of renewable energy at 34% of its plants; it has also managed to halve the water consumption at its sites (source: usinenouvelle.com article published on 14/11/19 at 9 am). While the investment theses for Amazon and Danone are less obvious than that of the wind-energy specialist Vestas, not everyone agrees, even when it comes to a method of carbon-free power production like wind. Keep in mind that every company has a dark side, especially the biggest ones. This is why ESG, sustainable, responsible, impact investing, or any other name that might highlight the fact that positive targets are set, has a “frustrating” side – like all of us, each has to deal with its own contradictions and is full of incongruities. But this should not be a discouragement nor cloud the fact that visible and relevant results are critical.

As can be seen from the above examples, the issue of climate change is (easily) transposable in terms of concrete investments. The important thing is to look for companies that are engaging in transition to a low-carbon economy or which are working hard to find solutions to cut greenhouse gas emissions. Some of the Sustainable Development Goals (SDGs) defined by the United Nations are:

1- Measures on climate action,

2- Affordable and clean energy,

3- Industry, Innovation, and Infrastructure.

Similarly, the issue of exhausting resources can be embraced by companies that set themselves targets to reduce and re-use resources. For example, water-themed funds address the SDGs of Clean water and Responsible production. However, not all SDGs are as easy for companies to focus on in their operations: for some SDGs, the impact of companies will be less clear or even less authentic. Beware the contortions of some asset management companies to try and add them to their credentials!

Grounded in reality

Promoting responsible investing (RI) by assuring investors that their investment will outperform is a risky bet which could backfire if the promise is not met. Especially as the ‘growth’ style, which corresponds to most of the RI universe, has had a very good run in recent years, significantly helped by the central banks’ interest rate cuts, chief among them the Federal Reserve. The ‘value’ style has had less opportunity to shine. A cyclical downturn or interest rate rise could, at least temporarily, have an impact on the upward trend of growth stocks. A quick look at the sector allocation of some sustainable funds highlights glaring biases: lots of Utilities that are very dependent on public regulations, lots of Industrials or  Materials that are very sensitive to the economic cycle, and lots of Technology. These biases are easily explained: it is in Utilities that you find companies specialising in water cycle management services or waste processing. The Industrial sector includes companies that are specialised in industrial automation, robotics and infrastructure. The Materials sector notably includes companies that will be at the forefront of tomorrow's raw materials that provide insulation and guzzle less energy while Technology companies invent software that will help other sectors innovate, test and implement. Given the scale of the challenges, massive investments will be needed and only well-positioned companies stand to profit. As long as they have competitive advantages and solid fundamentals, both cyclical and less cyclical companies will have the wind in their sails, despite inevitable bouts of volatility.

Positive changes in sight

Yes, sustainable finance is the latest fashionable topic. Yes, many asset management companies want to position themselves at the forefront and be influential in the field or impetuously make it their hallmark. Yes, ESG rating agencies, index constructors, ethical labels and charters are occupying the field without necessarily helping to smooth out the complexity of the subject. Yes, there are patent imperfections.

But what's not to like? This stage may be a bit messy but it is gaining in enthusiasm and above all it’s vital. Asset management companies are taking the subject on board for the long term and they are playing more than an anecdotal role. Their commitment is essential, both in terms of defining a sound ESG investment process and their capacity to gain the loyalty and confidence of the end-investors by showing them it is possible to grow their capital at the same time as adopting a sustainable approach. All in all, it's pleasing to be part of this new impetus and help shape it!

Fanny Nosetti, Head of Multi-Management

A native of the South of France, Fanny has been working in Luxembourg since 1997. Following a stint at a French bank in Luxembourg, Fanny joined Banque de Luxembourg in 2000, where she specialised in fund analysis and funds of funds management, before being appointed head of the multi-management team at BLI.

Fanny has a Master's degree in Economics from the University of Nancy in France. Via an exchange programme with the Faculty of Applied Economics at the University of Aix Marseille III, she obtained her first degree from the University of McGill in Montreal, Canada.

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