GIC on the ESG challenge: 'We don't blindly divest from whole industries'
There's no doubting the commitment to ESG, but how it is achieved - and when an organisation can say it has arrived at its goals - is still the subject of fevered debate.
“At GIC, we really believe that sustainability is core to our mandate in managing the reserves that have been placed under our management, and we need to do this over the long term,” said Rachel Teo, senior vice president, head of futures unit, economics & investment strategy department at GIC Pte Ltd.
During a panel workshop moderated by Teo at the IMAS - Bloomberg Investment Conference 2022 in Singapore, she and other leading responsible investors discussed the challenges that the current environmental, social and governance (ESG) landscape presents institutional investors, as well as their motivations for undertaking this trending investment transition.
“Companies with good sustainability practices will deliver good risk adjusted returns over time and we see that relationship is actually strengthening as well, as externalities are being priced in,” said Teo.
Briefly discussing Singapore’s sovereign wealth fund's approach to ESG investment, Teo said they are not big believers in bluntly applying negative screening — divesting from companies that score poorly on ESG factors — to its portfolio construction, as GIC is pursuing real impact in the real world.
“We don't blindly divest from whole industries, as we need to see a balance between societal and environmental needs — particularly in the last two weeks for energy security, and the importance of keeping the lights on,” said Teo.
NO PLANET B
The investment trend towards ESG has surged exponentially over the past few years and has become the main priority of asset owners and managers, but why?
“The world is changing, that’s very clear. There are certain elements that companies today have to think about versus 5 to 10 years ago — things like climate change, flood risk, data security, or diversity or inclusion,” said Paul Schofield, head of sustainable and impact equity at NN Investment Partners.
The trend toward combating these changes is also being driven by the social conscience of the millennial generation, who are taking over the investor base from the previous generation.
“They still want a return but they also want that money to work a little bit harder, and tackle issues that are now much more front and centre, whether that's inequality or climate change. They're demanding that we come up with solutions for them,” said Schofield.
Changes in regulation are also fueling the transition to sustainable investment practices.
“The amount of regulation pushing towards this style of investing is off the charts now and SFDR (Sustainable Finance Disclosure Regulation) is on everyone's lips in Europe,” he said.
Patricia Torres, global head of sustainable finance solutions, Bloomberg LP added that the Covid pandemic has been a great litmus test for how strong the trend towards ESG investment really is.
“People thought initially, that Covid could potentially reduce the assets under management linked to ESG, but that was not the case,” said Torres.
“I think for the first time, we're looking at people trying to put their money where their values are, because you really want to make sure that their money is making a difference in society. They know that there's no planet B, and therefore they have to protect what they have for themselves and also for their future generations.”
When translating these values into the market, Torres said there is now a huge search for ESG raw data, more than ESG scores, and around 8 out of 10 asset managers are integrating ESG factors into their investment analysis.
“In every RFP that we look at from an asset owner’s perspective — ESG is one of the key factors that they demand on asset managers.”
ESG REGULATIONS
During the panel Erin Leonard, global head of sustainability, HSBC Global Asset Management weighed in on what she saw as the most important development in the current ESG regulatory landscape — which remains fractured and challenging to navigate.
In Leonard’s view, the Task Force on Climate-related Financial Disclosures (TCFD) is a central piece of regulation as it requires companies to report on their carbon footprint.
“In the UK, the requirement will be in place from June 2023, and all companies in the UK will be required to report on their exposure to carbon emissions and as companies look at their footprint, they'll start to do something about it,” she said.
“That’s crucially important for investors as well to have apples to apples comparisons for company exposures.”
Across the European taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) has also made a huge impact.
“The SFDR has really mobilized the whole industry to put more focus around how we approach sustainable investing, how we design our products, how we disclose to investors what these funds are doing — and you've seen a massive transformation of existing funds and new launches,” said Leonard.
In addition to mandated guidelines, Leonard highlighted that many organisations are voluntarily mobilizing towards this change — such as the net zero asset manager initiative which requires signatories to sign up to 2050 targets and to look at reducing the carbon emissions in their full asset base to net zero targets by 2050.
“So far, there are 236 signatories, accounting for $57 trillion in assets. That's huge and it's foundational for the asset management industry,” she said.
“In practice, what it means is that we're all bringing in new data sets to analyze our carbon emissions, to look more closely at the high emissions industry, and to design pathways portfolio pathways for this admissions journey.”