The ESG Evolution Moves Into 2022

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  • 04 mins 41 secs
Mirova’s Amber Fairbanks talks opportunities, risks, and regulations for environmental, social, and governance investing.
Channel: Natixis Investment Managers



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In terms of where we’re finding opportunities, I think it’s really in innovation.  Healthcare innovation, for example.  We have robots now that perform surgery.  We’re going to have cars that drive themselves.   It’s going to be -- you know those companies that are really innovative, really moving the market, I think, that are going to outperform.  And I also think there’s an opportunity as well, not in traditional energy but in alternative energy.  You know, we’re coming off of COP 26.  There were a lot of promises ‑‑ a lot of really aggressive targets too that are going to require really aggressive action to come and meet those.  The wind energy in particular, we find really interesting.  The economics of wind energy makes sense.  We think that’s going to be strong growth going forward.  Green hydrogen is an area that’s really interesting. Still fairly nascent, but I think that if you look forward over the next 10 years, certainly an opportunity to really meet those targets around greenhouse gas emissions.  Some companies that are positively exposed are looking quite interesting right now.

 

I think from a risk perspective, it’s becoming increasingly important for institutions to consider ESG.  If you look at the S&P 500, for example, in 1975, if you look at the value of the S&P 500, about 15 percent of that, that’s intangible assets, so things like brand image.  If you look at it today, it’s 90 percent.  So it becomes increasingly important for companies to protect their brand image through really strong policies around material, environment, social, and governance risks.  Particularly given how fast information travels these days, where one tweak can essentially change the image of a company quite quickly, and the market is increasingly punitive as well in companies that really don’t have strong supply chain management, things like that.  So I think that it becomes increasingly important for institutional investors with a timeframe longer than a couple quarters to really start to think about ESG risks, and I think that’s really what’s been driving a lot of the growth in the ESG space is that recognition of risk and how it’s becoming increasingly tied to company valuation.

 

So on the cost side, I mean we’ve already seen a lot of regulation in Europe, which is where Mirova is based.  So for us, it’s not an increased cost to deal with that.  In fact, all of our strategies now are SFDR Article 9, meaning we consider both impact and ESG as part of the strategy. 

 

With regards to standardization of data, I think that’s a really interesting topic because some data that you consider in investments in important from a standardization, from a quantitative perspective, but there’s a lot of qualitative information that gets factored into ESG assessment, and that’s not something you can standardize.  So take Volkswagen, for example.  This was a company that, back before 2015, we looked at it.  It was a company that had essentially no independence in its auditing committee, in its remuneration board.  They hadn’t articulated a strategy on electric vehicles.  They had some, you know, ethics breaches as well.  You know, not a company that we would have said, “Oh, they’re going to go ahead and cheat on their diesel emissions tests,” but a company that we recognized as a risky culture overall.  But that wasn’t a quantitative decision.  That was looking at a number of factors, some of them quantitative, some of the qualitative, and really forming an opinion around that.  So I think that that’s something that’s really going to be a differentiated source of alpha going forward, relying on third-party data providers.  But, you know, really just look at quantification of data, I think is problematic, and that’s why you have such different opinions between third-party providers in terms of whether or not they consider a company ESG-friendly or not.  So I think, you know, good to have more data, but it’s like looking at a financial statement.  You don’t just look at an income statement and say, “Okay, this is a great investment,” even though that’s all, you know, quantifiable data.  You look at a much bigger picture.  So I hope that we’ll still have that source of alpha going forward.  I tend to believe it’s not all quantifiable and it’s actually a benefit if people start to think that it is.

 

So at Mirova we really believe the market’s underestimating the growth opportunities coming from long-term secular trends, so we focus on demographics, technology, the environment, and governance.  Also really strongly believe the market underestimates the risk coming from poor ESG practices. So really we’ve built our entire investment process to exploit these market inefficiencies to both drive outperformance and to create a portfolio with positive social and environmental impact.

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