If Europe seems ahead when address- ing ESG issues, can emerging markets still be ignored?
We frequently discuss the question of whether ESG makes sense for emerging markets with institutional investors, especially since the low-yield environment has driven geographic diversification. On the one hand, emerging markets might seem less suited to ESG because of less reliable data, different disclosure and governance standards and ownership structures. On the other hand, one might think that ESG risks are more pronounced in emerging countries and that avoiding them could therefore lead to better investment outcomes.
In light of this, we carried out a study on the evolution of emerging market equities for the period from 2008 to 2018. The study finds that considering ESG criteria when investing in emerging markets can potentially have a positive impact on risk-adjusted performance. Further, we examined what an ESG-downgrade means for the performance of a stock. The study shows that after stocks fall out of the ESG-eligible universe, they tend to underperform over periods from one to three years after the downgrade.
Thus, studies like this one show that consideration of ESG factors can in fact make sense when investing in emerging markets. However, a specialist research team is needed to look at the respective nuances of assessing ESG factors in emerging markets.
Regulation is ultimately making the investment universe smaller. Investors must have plenty of questions...
While excluding or reducing certain ESG risks can result in changes in portfolios, it can also offer significant advantages. As a result, there are in fact more and more investors asking about ESG strategies. Decision-makers at insurance companies and pension funds are increasingly aware that ESG can add value when it comes to risk management and can thus contribute to investment results. However, not every approach and implementation method suits everyone. We help our clients to find the right solution - ranging for example from exclusion policies, best-in-universe and integration approaches, to portfolio decarbonisation solutions and impact investments. Regulation also leads to greater transparency and disclosure. For example, Sustainable Finance Disclosure Regulation (SFDR) will require EU financial market participants, including insurers and pension funds, to communicate on their ESG risks and potential adverse impacts on ESG factors, both at the entity and at the product level. This is a key driver of ESG adoption. It will encourage some insurers for example to think about the opportunities that sustainable investing may offer in terms of product development and commercial positioning.
Investors are entering into dialogue with companies to ensure that they can create lasting value for the long term. What are their observations? Is management open to this and making the effort to implement the issues addressed?
In the area of stewardship, we rely on two pillars. Firstly, engagement. Here, we seek a direct dialogue with the company. There is also the dialogue that we, together with other asset managers, have with companies through collaborative initiatives.
In our direct dialogue, we focus on specific issues in three areas: the energy transition, fair working conditions, and corporate ethics. Through close communication and by listening intently and critically, we, as investors, can both effect change and better understand why a company is performing one way or another when it comes to “E” ratings, for example. This is not always fully apparent from publicly available information. Moreover, and very importantly, we encourage companies to adopt improved policies and practices.
The second pillar of stewardship is voting; that is, actively participating in the voting process. At Candriam, we have long been making our voice heard as an active shareholder and formalised our proxy voting policy in 2003.
Thus, by engaging in open, honest dialogue and actively taking part in voting and shareholder resolution initiatives, we contribute to motivating companies to improve their ESG performance.
Corporate ethics in particular have become increasingly significant for consumers and investors in recent years. What is Candriam’s overriding interest in this area?
All kinds of things! Equal opportunities for men and women, and lobbying, particularly with regard to big business, management board remuneration, the role of trade unions, dialogue between unions and employees, interaction with suppliers but also pricing - for pharmaceutical groups, for example - all of these, and many more, are considerations here.
Many investors are now looking very carefully at the assets they invest in, while at the same time shouldering the additional burdens of expanded risk management and regulation. How is the sector dealing with this?
We should take our hat off to institutional investors, such as pension funds and insurance companies, for the way that they have consistently coped with the increase in regulation and new requirements such as accounting changes in recent years. Moreover, the increased price pressure has added to the complexity of the low-yield environment and may have lead to consolidation and changes to corporate structures. In this context, it is important for institutional investors to have the right partner by their side, and this is another reason why asset managers have had to broaden and adapt the solutions they offer. If we want to offer attractive solutions to investors, who we see as partners here at Candriam, we need to not only understand the regulations but also incorporate them into our investment solutions.
We need to integrate the accounting requirements into our investment solutions. When it comes to regulation and accounting, this means that we generally need to speak the same language as insurance companies, pension funds and institutional clients.
We want to be there for our clients along the entire value chain. To do this, we clarify with our clients exactly what ESG policy and strategies suit them best, and what the potential consequences will be for the portfolio if we set things up one way or another.
But all of this comes at a price...
In light of the low interest rate environment coupled with the current COVID-19 crisis, we need to think very carefully not least about our cost efficiency and the cost efficiency of the investment solutions we offer. We need to generate performance and keep an eye on costs despite the challenging environment.
Why should investors take a closer look at Candriam?
We have a great deal of expertise that is attractive to institutional clients. We are a medium-sized company, supported by a large, financially robust group.
Nevertheless, we have the necessary flexibility to put together the teams required to offer clients bespoke investment solutions. We have developed the internal resources that matter to institutional clients. For example, this includes specialists in the insurance segment, specialists in the pension fund segment and our own in-house actuaries, who are very familiar with insurance companies and pension funds. This means that our teams understand what our clients need and their financial, regulatory and accounting constraints.
Last, but not least, Candriam has a long track record of ESG-related investments, having launched our first sustainable fund back in 1996. We have over time developed a comprehensive in-house ESG research practice, combining the industry expertise of ESG analysts with state of the art ESG data from leading vendors. As a result, we can offer the best of both worlds: ESG expertise and a decisive focus on institutional clients.