How leading asset owners integrate ESG in asset allocation

0:00:01  Teaser Video
0:00:48  Opening Remarks
0:08:04  ESG Position in Asset Allocation – The Understated Benefits of ESG Investing
0:23:32  More Investors to Embrace ESG in Asia
0:31:57  How Leading Asset Owners are Integrating ESG in Asset Allocation
1:21:12  ESG Natixis Portfolio Clarity
1:25:03  Closing remarks

DISCUSSION HIGHLIGHTS

Opening Remarks

Fabrice Chemouny, Head of Asia Pacific at Natixis Investment Managers

Fabrice Chemouny

• Natixis Investment Managers is managing more than €1 trillion on behalf of clients around the world. We are operating on a multi-affiliate model that includes 22 subsidiary firms, with each specialising in particular asset classes.

• We essentially focus on active management, putting environmental, social and governance (ESG) at the heart of most of our investment strategies. We started to believe in the idea of ESG almost three decades ago as our first ESG fund was launched in 1984, demonstrating that we are a pioneer in the space.

• We have observed an increasing number of searches from all types of asset owners, from private banks to sovereign wealth funds, on ESG capabilities.

ESG Position in Asset Allocation – The Understated Benefits of ESG Investing

Maxime Druais, Project Manager of the Environmental Transition at BPCE Group

Maxime Druais

• ESG is not opposed to fiduciary duty, according to MSCI research.

• At Natixis, there are three steps to integrate ESG in investment decisions: mitigating the transition risk, questioning our reward and commitment.

• Today, Natixis follows four key performance indicators (KPIs) on ESG that are publicly released each year. More than 70% of our assets are covered by ESG ratings.

• ESG integration for private assets is challenging. Investors have to set up a due diligence process with the proper metrics and framework.

• The lack of standardised definition, benchmark and data is the biggest challenge of integrating ESG. In view of this, a mixed use of methodology, or the use of internal methodology that partly relies on external providers, is important.

More Investors to Embrace ESG in Asia

Adeline Tan, Wealth Business Leader at Mercer

Adeline Tan

• Regarding stewardship, institutional investors that allocate investments through third-party managers need to feel that the managers are acting in their interests.

• The screening approach has been around for a very long time. But we don't see it as being ESG nor being sustainable because investors are simply excluding certain sectors and companies, and those sectors and companies can change themselves. Investors using the screening approach may not be on the pathway to promote sustainability.

• Integration is usually what Mercer spends time with clients on, because in this approach investors are trying to make sure that opportunity factors are not missed in the investment decision.

• ESG investing also includes allocation on sustainability themes or impact investments, which focus only on companies that help economies transition to a better future, for example renewable energy and social housing.

How Leading Asset Owners are Integrating ESG in Asset Allocation

Takeshi Kimura, Special Advisor to the Board at Nippon Life

Takeshi Kimura

• In spring this year, Nippon Life began incorporating ESG factors into the investment process of our $670 billion portfolio, aiming to achieve net-zero emissions. The portfolio is composed of equities, corporate bonds, sovereign bonds and real estate.

• There is no one-size-fits-all ESG integration approach for all assets, as material ESG factors vary by sectors and investee companies.

• ESG is useful as a new measure to enhance our asset management policy. We can use ESG as a common language when we have dialogue with various investors and various stakeholders. The common language is very useful to address systemic risk. ESG integration makes our portfolio more robust.

• Nippon Life adopts a decentralised approach in ESG integration, in which portfolio managers are responsible for integrating ESG investment, and other members in the team carry out ESG research, including materiality or trend analysis on specific sectors or themes.

• Regulators have a very important role in ESG investing. The urgent issue is to narrow a perception gap between investors and investee companies with regard to the degree of non-financial information disclosure.

• There is much work to be done to make sure ESG integration is an effective means to boost investee companies’ corporate value and hence our investment return. In the financial industry, nobody has sufficient knowledge of ESG integration given the incomplete measures of sustainability and inconsistent disclosure standards. In addition, there is limited research that explore how climate risk affects our portfolio performance. Fully integrating ESG factors into the investment process takes a long time and requires trials to find the best practices.

Koji Watanabe, General Manager of Equity Investment Department at Asahi Mutual Life

Koji Watanabe

• ESG integration in investment should consider social and environmental growth, as well as profits.

• The integration can be defined with three basic requirements: data, investment process, and active ownership. We emphasise active ownership. Through dialogue, some companies improved.

• The most important issue is carrying out ESG integration for existing assets. It is relatively easier to apply ESG standards on new investments, but more challenging for the assets we retain.

• Japan’s net-zero goals for 2050 have helped push companies to jump on the ESG board. That is a big phenomenon. Many companies are going to sign the TCFD (Taskforce on Climate-Related Financial Disclosures). The number of United Nations’ Principles for Responsible Investment (UNPRI) signatories in Japan have also been increasing.

Srikanya Yathip, Secretary General at the Government Pension Fund (GPF) in Thailand

Srikanya Yathip

• In ESG integration, the tone from the top is very important. When the action plan or a new ambition is made clear, then the team will follow.

• The top management can set up actionable sustainable objectives, redesign asset allocation, talk about material ESG factors in asset pricing, deal with one-on-one engagement with companies and asset manager, among other efforts to promote ESG within the organisation.

• We have clear criteria in our manager selection. The manager has to pass all criteria and one of them is an ESG integration process. They have to lay out clearly their ESG approaches not just within the organisation, but also on the entity that they are investing in on our behalf.

• GPF is trying to develop a human rights common framework for Thai-listed company. We also get support from the Ministry of Finance and the bank association in Thailand, bringing them together to discuss how to promote sustainable investment in Thailand.

Stephanie Weston, Head of Portfolio Design at Hesta Super Fund

Stephanie Weston

• We generically refer to ESG as an impactful investment. We look to not only invest well, but also provide advocacy and act cooperatively to create a more sustainable world.

• Hesta Super Fund’s members include a lot of healthcare workers, nurses, age-care staff. So one of the key ESG factors or investment themes is health and well-being. It is something that resonates particularly with our fund.

• There are about 11 companies that represent about 75% of the carbon emissions in Australia. We view very much our role as being an advocate and a force for change amongst those companies. It does not mean instant divestment, but it does mean active ownership, ongoing advocacy, and maintaining pressure on those companies and more generally, in the political sphere.

• Most of the superannuation funds will have a reasonably large holding in domestic equities, smaller than the international equity exposure by and large. It is more challenging to achieve some of our carbon targets in the domestic portfolio than it is in the global portfolio. That said, the superannuation industry in Australia is becoming larger, which means we will likely invest less domestically.

Adeline Tan, Wealth Business Leader at Mercer

• Among my clients in Asia, a major challenge is what ESG means to them, owing to the fact that there is no natural standard to define what is the best and what is the worst.

• The best practice in ESG is where asset owners have separate teams or work groups that focus on different areas of engagement. There can be experts on stewardship, groups that look at international studies and the latest regulations. That is a great way of building capacity and keeping up with the trends in the ESG sphere.

• Governance standards on ESG will become higher. There are going to be more rules about what qualifies for the label of ESG. Investors may also need to consider the different types of tax on different investments.

ESG Natixis Portfolio Clarity

Claire Martinetto, Head of Natixis Investment Managers Solutions

Claire Martinetto

• The ESG and Climate Natixis Portfolio Clarity provides a very detailed ESG and climate portfolio assessment based on well-known ESG data providers.

• The tool offers look-through analysis, and is very interactive and flexible to cater to specific client needs.

• The service was launched one year ago, and more than 100 portfolio clarity analysis over geographies and client segments were completed.

• Users can compare the ESG risk score generated by the service to a benchmark or a custom-made category.

Closing Remarks

Estelle Castres, MD, Insurance Companies & Co Head BDU Western Europe at Natixis Investment Managers

Estelle Castres

• ESG is about managing risk on one side, but also taking many opportunities on the other side. It is clearly moving from a nice-to-have thing to a must-have one.

• The European Commission just shed more light on the taxonomy and the level of disclosure that corporates will have to follow through in the coming months and coming years, in order to avoid greenwashing.

• Natixis IM deploys a multi-affiliate model. Each of our affiliate has its own methodology towards ESG integration, so institutional investors can find the one that best fits part of the portfolio.

• Natixis IM was highlighted among the certified ESG leaders by the UNPRI, underlining its commitment to bring value to and partner with asset owners.