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ESG investing matures

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One aspect of change that has started influence the way alternative fund managers think about their strategies is the increased focus on sustainable investing among institutional allocators. ESG considerations are becoming part of the manager selection process, as a way to determine what ESP principals are being applied, how this affects the investment process, and what tools, if any, can be used to benchmark performance. 

Piet Klop is Senior Advisor Responsible Investment, PGGM, a leading Dutch pension fund service provider with approximately EUR211 billion in AUM. He believes there are several sides to the ESG debate. 

“I like to separate the risk side from the opportunity side,” said Klop. “On the risk side, I think the emphasis will be on forward-looking ESG data. A lot of that will include data from unconventional sources including machine learning data, satellite data, etc, and building out ‘what if’ scenarios; in other words, to move away from only looking backwards in the rear view mirror and thinking about risk in more forward-looking terms, using ESG data to project scenarios, such as climate change, which right now we believe are still underutilised in ESG investing. 

“On the opportunity side, I think there’s going to be an increasing emphasis not only on doing things right but also on doing the right thing. There is demand on institutional investors, especially in northwestern Europe, to demonstrate proof of impact of their ESG investments. I believe that will be a big trend.” 

One important point made during AIF 2019 was a moral conundrum. As ESG creeps into alternatives, how does a fund manager argue the case for shorting what is believed to be a solid ESG-focused company, yet whose stock price they feel is overpriced? Can one arbitrage in an ESG market? It’s an ongoing discussion that investors need to have. 

The audience was asked: Regarding your firm’s investments/investment process, in 2019 ESG considerations are:

• Increasingly important to your firm – 64 per cent;
• Equally or less important than last year – 36 per cent.

Also, 62 per cent of the audience said they believed asset owners could best influence adherence to ESG. 

To exercise that influence, however, fund managers need to see more ESG investment tools in the marketplace. Little has happened in the managed futures space, for example, with Eurex only recently launching three ESG-compliant futures contracts. So while interest in ESG is undoubtedly growing, more work is needed to develop ESG-compliant futures contracts, green bonds, and so on.

Otherwise, the extent to which ESG principals influence investment strategies will remain stymied. 

“There is growing interest but it remains to be seen if people are actually pulling the trigger,” said Nick Samuels, Head of Manager Research, Redington, a London- based investment consultancy. “Defined benefit pension schemes are starting to focus on ESG but so far it’s only been in the equity long-only space, although there are now some green bonds and some UK real estate opportunities.” 

Throughout the course of the ESG debate, there was broad agreement among panellists and delegates that a common definition and a common reporting framework are needed to help standardise and benchmark ESG investing. 

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