FRONT STORY ETHICAL INVESTMENT
Funds grapple with ESG dilemma
Market continues to develop and implement environmentally friendly principles
Some managers concerned ESG rules could limit investment opportunities
Asset managers are increasingly making
SUSTAINABLEûINVESTMENTûDECISIONSûTHATûREmECTû
their own corporate values and those of
their investors, but are still under pressure
to deliver competitive returns as the market
continues to develop and implement
environmentally-friendly principles.
Many of the largest money managers
including Neuberger Berman, BlackRock
and PIMCO have dedicated environmental,
social and governance guidelines for their
own investments, and are also balancing
requests from their investors, including
pension funds, endowment and family
OFlCES ûTOûLIMITûINVESTMENTSûINûINDUSTRIESû
including gun-making, fossil fuels and
healthcare.
Asset managers face dilemmas in
implementing ESG guidelines as to where to
draw the line on sustainable values, as green
lending principles continue to gather
momentum in the institutional world.
“It’s really complicated to establish
moral principles for other people’s money,”
said Karen Petrou, a co-founder of
CONSULTINGûlRMû&EDERALû&INANCIALû!NALYTICSû
“Once you get past businesses that are
clearly illegal – it gets a lot trickier in
businesses and areas that are legal that you
just don’t like.”
&INANCIALûMARKETSûAREûBECOMINGû
increasingly focused on ESG principles.
Bank of England Governor Mark Carney
warned earlier this year that once climate
change becomes a “clear and present danger
TOûlNANCIALûSTABILITYvûITûCOULDûALREADYûBEûTOOû
late.
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including internal ESG company rankings
that include a report of every borrower
engagement and a list of steps being taken
to remedy potential concerns.
But other managers are sitting on the
sidelines as ESG investing continues to
develop, due to concerns that proscriptive
rules could limit investment opportunities.
#REDITûMANAGERSûREPORTûTHATûASûSPECIlCû
requests from their investors increase, they
are being forced to reconsider investments
that would not previously have rung alarm
bells.
Several managers pointed to the extended
life cycle of an investment. While a
manufacturer that makes parts may not
raise concerns, if those parts could be
installed in helicopters that are sold to the
US Department of Defense, it could trigger
prohibitions against investments in
ammunition and guns.
The risks embedded in supply chains are
also a concern for manufacturers that are
attempting to adhere to ethical guidelines
due to potential exposure to natural
resource depletion, human rights abuses
and corruption.GUIDELINES SET
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protocols are trying to set strict
QUANTIlCATIONûFORûGUIDELINESûANDûDEVELOPû
indices that rely on them, according to Scott
-ATHER ûCHIEFûINVESTMENTûOFlCERû53ûCOREû
strategies at PIMCO.
“That’s certainly better than doing
nothing, but in our view that has some
MAJORûmAWSûTOOûBECAUSEûITSûDIFlCULTûFORû
PEOPLEûTOûDOûAûONE
SIZEûlTSûALL ûANDûDRAWûTHEû
line here for this company versus that
company,” he said.
The Newport Beach, California-based
asset manager, which oversees US$1.84trn,
has its own internal ESG rating system that
is used in its dedicated ESG funds, but is
available to all of its funds. Although the
lRMûLOOKSûATûALLûAVAILABLEûDATA ûTHEûlNALû
investment decision comes down to human
judgment, he said.
“We rely on our analysts to decipher
where to strike that balance,” Mather said.
Proponents of ESG-focused investments
POINTûTOûTHEûENVIRONMENTALûBENElTSûTHATû
sustainable investing can promote, but also
highlight the positive impact on the bottom
line as ethical capital is attracted to the
funds.
Riskier sub-investment-grade companies
have less margin for error due to their
indebted balance sheets, so Neuberger
Berman’s evaluation of ESG factors helps
identify tail risks before they materialise in
a company’s operations, said Christopher
Kocinski, senior portfolio manager for non-investment grade credit at the New
York-based manager that oversees
US$333bn.
Neuberger Berman has evaluated ESG
factors for more than 20 years and assigns
scores to issuers that it invests in based on
management quality and governance
framework.
“We think that as we go through a full
market cycle that that will improve the
overall quality of our portfolio and improve
OURûRETURNûPROlLE vûHEûSAIDPOLITICAL PRESSURE
7HILEûlNANCIALûINSTITUTIONSûAREûSETTINGûTHEIRû
own ESG standards, Congress has tried to
legislate to better help investors assess
climate risks.
Presidential hopeful Senator Elizabeth
Warren, and several co-sponsors, in July
introduced the Climate Risk Disclosure Act
of 2019, which would require public
companies to disclose their exposure to
climate-related risks.
On the other side of the aisle, Republican
Senator Kevin Cramer and co-sponsors
PROPOSEDûTHEû&REEDOMû&INANCINGû!CTûEARLIERû
this year, which would in effect block banks
from refusing to make loans to businesses
engaged in activities that are considered
socially controversial by cutting off their
ACCESSûTOûTHEû&EDERALû2ESERVESûDISCOUNTû
window.
The bill followed limits on lending to the
gun industry by banks including Citigroup
that followed a wave of mass shootings in
the US.
With competing pressures, asset
managers say ESG discussions are
continuing to evolve, but are set to
play an increasing role in investment
decisions.
“One of the challenges of ESG is it means
different things to different people,” said
John Vibert, head of structured products at
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principles that have been a long-standing
part of our process, but have gotten more
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more recently.”
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