In October, independent global asset manager Comgest shed light on its Shariah strategy and outlook on the Islamic investment space in an interview with IFN. This week, the group’s ESG Investment Team shares its take on environmental, social and governance (ESG) investing, a stream of finance with increasing influence on Islamic finance due to their strong commonalities and objectives.
Morningstar data shows ESG investments surpassing the US$1 trillion milestone in the second quarter. What do you make of that?
This Morningstar data shows that investments that take into account environmental, social and governance (ESG) factors have long passed a tipping point in asset management which we believe makes it here to stay. When Comgest started investing heavily in ESG resources and capabilities 10 years ago, various people in our industry thought of ESG as merely a niche market, or even a fad. Some of those people have now become ESG zealots who state there is no other way to invest than via an ESG lens. On the one hand, we welcome rising interest in ESG, as it will take a lot more people and resources to reform parts of the economic system if we want to make it more sustainable, but on the other hand, we as an industry need to be careful with the claims made by some investors as ESG is a complicated topic with many different trade-offs. ESG investment information should be as clear and transparent as possible for clients so that ESG claims are taken seriously.
|Table 1: Aggregated temperature of the Rep. Acct.1 and Index|
|Warming potential||Combined temperature|
|MSCI Europe Index||3.15°C|
|Source: Comgest, MSCI. 1Data is for Comgest’s Pan-European Equity Representative Account, a pooled investment vehicle which has been managed in accordance with the strategy discussed since inception of the strategy. To determine the alignment of a fund with the 2°C target, Comgest uses the ‘Warming Potential’ metric that was developed by MSCI in the first half of 2020. According to MSCI, the Warming Potential metric encapsulates a company’s contribution to rising temperatures.|
What is the global pandemic teaching us about ESG investing?
The global pandemic is teaching us a couple of valuable, if not essential, lessons. Notably, it is showing us that:
• Even after being warned for years and decades about the likelihood of a global crisis, people have a hard time addressing what are perceived to be distant future problems. What is worse, when faced with risks that are more immediate, as seen in the weeks and days leading up to the COVID-19 crisis, many companies and governments were still slow to react and remained unprepared — despite witnessing the virus spreading throughout China and across the world.
• Postponing painful decisions and actions can lead to a much higher cost.
• Believing in science and using it to address complex issues can help minimize the costs of a severe crisis.
• Global solidarity and the orchestration of specialized and localized teams can help people make quick and impactful decisions in an emergency.
Having a long-term and inclusive view of potential risks is always prudent — be it in asset management or in a person’s own affairs. This is especially true during a pandemic, but is likewise applicable to issues such as climate change, the destruction of ecosystems and inequality. ESG investing is defined by these ideas of long-term sustainability, responsibility and inclusion.
Comgest’s style of quality growth and responsible investment is all about the long-term view and sustainable growth. We invest in only a small number of companies that we believe have sustainable competitive advantages, high barriers to entry and pricing power which make them capable of growing their medium-term earnings, irrespective of the economic cycle. To confirm the quality of our companies, we integrate ESG factors into our stock selection process, as we believe these can impact a business over the long term. Since we view risk from the fundamental company level, it is our belief that the quality of our companies and their competitive advantages should help shield our portfolio companies from various crises.
|Table 2: 2°C scenario|
|2°C scenario||Aggregated climate VaR (Policy + Technology + Physical)||Policy climate VaR||Technology climate VaR||Physical climate VaR (aggressive scenario)|
|MSCI Europe Index||-6.41%||-7.88%||5.28%||-3.81%|
|Source: Comgest. 1Data is for Comgest’s Pan-European Equity Representative Account, a pooled investment vehicle which has been managed in accordance with the strategy discussed since inception of the strategy. 2Comgest uses MSCI’s Climate Value-at-Risk (‘Climate VaR’) methodology for the measurement of climate and energy transition risks. MSCI and Carbon Delta developed this methodology to provide a forward-looking and return-based valuation assessment to measure climate-related risks and opportunities in an investment portfolio. The Climate VaR includes both transition and physical risk assessments and can be negative (cost) or positive (gain), and the horizon is the next 15 years. Transition risk assessment includes both policy risk and technology opportunities.|
What are the biggest trends in ESG investing? Where is the demand coming from?
Nowadays, the biggest trends in ESG are in accelerating the fight against climate change and reducing inequality. Across all regions, citizens, corporations and states are witnessing an increase in the frequency and severity of extreme weather events, floods and wildfires. The level of awareness on these issues and the sense of urgency have reached new heights at a moment when new regulations and commitments are being announced either by countries or companies. Investors should play a role by challenging companies that are lagging in ESG and companies should be embedding climate risks into their risk management tools. On both fronts, companies are achieving advances via collaborative engagements (such as the Climate100+ or the science-based Target initiatives) and a new generation of tools that enable better scenario modeling (for transition risks in particular) and physical risk mapping. Comgest, for instance, has broadened its reporting to the financial impact that may result from various policy changes (eg carbon tax, carbon quotas, etc) and physical risks (floods, heat waves, snow, etc). For our portfolios, as seen in the following charts, we are then able to show where such risks to our companies come from and how they compare to an index.
With regard to reducing inequality, we have seen companies making efforts to address this issue. One way to illustrate this is to look at how companies perform on the different Sustainable Development Goals (SDGs) set out by the UN. There is a difference in what we read in the sustainability reports of companies and what should be considered as a material contribution to the SDGs. Based on our research, over the last few years we have seen a reduction in the gap of what has been communicated in reports versus the reality from the field. As of the end of 2019, our analysis has shown that our portfolio companies contribute to a total of 98 SDGs, rather than the estimated 288 reported in their sustainability and corporate social responsibility reports.
For professional investors only. Investing involves risk including possible loss of principal. Past performance is not a reliable guide to future performance. Indices are presented for comparative purposes only.
Representative account information: The representative account discussed is managed in accordance with the relevant Composite since the Composite’s inception. The representative account is the open-ended investment vehicle with the longest track record within the Composite. To receive a GIPS compliant presentation for the composite discussed, contact [email protected]
This material is for information purposes only. The opinions and estimates expressed in this document are valid at the time of publication only, do not constitute independent investment research and should not be interpreted as investment advice. This advertisement has not been reviewed by the Securities and Futures Commission (‘SFC’) of Hong Kong nor by the Monetary Authority of Singapore (‘MAS’). Comgest S.A. (17, Square Edouard VII, 75009 Paris, France) is regulated by the Autorité des Marchés Financiers. Comgest Far East Ltd (Hong Kong) is regulated by the SFC. Comgest Singapore Pte. Ltd. (Singapore) is regulated by the MAS.
For further information on the Comgest Shariah strategy, please contact Robert James, the managing director of business development and client services based in the Comgest Hong Kong office, at [email protected] comgest.com.