Asset managers have witnessed an exponential growth of interest among investors in socially and environmentally responsible companies in the past few years.
With the imminent gathering of policy-makers, politicians, corporate managers and activists at COP26 in Glasgow in November, it’s not surprising that some companies are wooing these eco-conscious investors by demonstrating sustainability across their processes, products and work practices.
Richard Kelly, head of client business in Ireland for Legal & General Investment Management (LGIM), says that as asset managers they engage directly with companies to improve their sustainability ranking.
“We give companies a score based on their environmental, social and governance factors, and we push them on their environmental footprint, their business ethics, their social diversity and we also look at investor rights,” says Kelly.
The latter refers to the amount of shares investors are required to have to be allowed to vote – and therefore influence the company’s policies – at annual general meetings (agms).
“It’s important to make sure that these practices are supported at board level. The day after we attend agms we publish our notes for/against board resolutions so investors know that asset managers have these issues close to their heart as well,” adds Kelly.
LGIM’s Climate Impact Pledge grew from focusing on 80 companies in 2016 to over 1,000 companies in 2021. Information on the performance of these companies across a range of sustainability rankings are publicly available on the LGIM website which ensures transparency and drives change.
“In some of our portfolios we will increase the amount of investment if a company has higher scores. We will also work with companies to improve their practices and exclude them from the environmental/social/governance portfolio if they don’t,” says Kelly.
For example, the American food company Kroger was excluded for a time and then brought back into the portfolio when it committed to making new plant-based products with a lower climate impact and reducing emissions in its operations. EU regulations are also driving capital towards companies aligned with the Paris Agreement.
Concerned
Kelly says that investing in companies that are transitioning to a low carbon environment will continue to return better investment.
“During the Covid pandemic people realised that Covid and climate are intrinsically linked and became more concerned about the world around them than ever before,” he says.
LGIM is also a founding member of the Net Zero Asset Managers initiative which was launched in December 2020.
Sanaa Mehra works in the sustainable debt capital market for Citi. She says that the momentum of investors’ interest in environmental, social and governance investing has grown significantly over the last few years, and particularly intensified post the Covid pandemic.
“Previously environmental, social and governance (ESG) factors were a tick- box exercise but now investors are acutely aware of sustainable products and managing material ESG risk across all industries. They want to see companies’ decarbonisation plans and their sustainability and diversity policies,” she says.
“The issuance of sustainable bonds (including green bonds) in this space has grown from $34 billion in 2014 to $700 billion so far in 2021. We expect it could rise to $1 trillion by the end of 2021,” says Mehra.
Citi is an underwriter in the green bond market, and often works with companies in setting up green and sustainable finance frameworks which enables the issuance of instruments like green bonds. “It can take three to six months to develop a green bond on behalf of a company,” says Mehra.
EU guidance
She says the definition of what is an eligible green project has developed in the last few years as the EU has published its EU Taxonomy which defines what a sustainable economic activity is across various industries.
“There is much clearer EU guidance now as the EU Taxonomy is being published. That means our clients can showcase to investors that the company is doing the right thing, and is aligned to recognised criteria and standards.”
Sustainability has also become a key performance indicator for many companies as the concept of double bottom line companies (a good investment for both financial and sustainability reasons) gains ground.
“Environmental, social and governance disclosures are now as important as the financial or credit metrix for companies,” says Mehra.
