Thomas A. Jesch, Managing Board Member, German Association of Institutional Investors, discusses the role of ESG in the context of the aftermath of Covid-19. Concerns over the environment are not forgotten during crisis, only intensified. Here's what they mean for investors.
Even in times of crisis, one overriding theme remains with us: the "E" of ESG - i.e., sustainable investments with special consideration of environmental aspects. It is true that the virus may hold us in its spell for a short time, at least mentally, and may even lead to a measurable reduction in environmental pollution in some selected areas. But this is merely a consequence of the lockdown, probably a seductive illusion.
For institutional investors and all other stakeholders, it is high time to professionalize their ESG processes or even to set them up in the first place, also against the background of the materialising EU regulation.
The fearful sticking to technologies that are no longer sustainable is likely to take its revenge for providers and investors alike in the medium term. Yesterday's operating margins can only be maintained by those who create new value through a new focus, also from the point of view of the target group.
On that end, PRI have just launched their "Investing with SDG Outcomes" report. That is exactly the right question: How do we get the results rather than a mere label? And some decent returns wouldn't hurt either.
But, what next?
Now, how should we proceed wisely? First of all, the basic process of investing "from the top" has to be made sustainable - then the assets – often products – have to meet the corresponding sustainability criteria. Finally, products incorporate assets which must also be ESG-compliant.
The process
But how do you not only add "ESG ornaments" to the institutional organization, but become sustainable yourself? By anchoring it at the top. A "Head of ESG" or "Head of Responsible Investing" with both a management and instructional function is increasingly common. She must provide impulses to the entire organisation – through training and corporate events. Specifically in the area of investments, targeted questionnaires must be developed for product providers, which combine the company's own focus and generally applicable criteria and objectives, such as the SDGs mentioned above.
The product
In the environmental field alone, there are many energy sources, objects and geographies worthy of protection. It is always advisable to use a specialist approach to structure a product that is clearly tangible to the investor. The "right" indices and databases are a helpful means to an end – in second place.
The dialogue with the target group is crucial in order not to work past the buyer. In case of doubt, church sponsors and CTAs have a varying appetite for ESG and this is completely understandable.
The asset
As a German, I would like to take discretion for a brief look at the automotive industry. It is rather reluctant to switch to more climate-neutral engines. One important reason: so are their customers. Here, the state is actually being called upon for a transitional period to make, e.g., vehicles with battery-powered engines, more appealing to the buyer. Henry Ford had it easier in so far as the car had obvious advantages over the horse.
The younger generation is open to electromobility, but this asset must become more attractive, as the automobile is no longer universally seen as a prestige object.
What needs to be done to promote ESG-compliant investments among institutional investors?
A lot, without question. Three points seem essential to the author.
1. An organization that is not sustainable in its basic structure will hardly make a consistent and wise choice when selecting sustainable assets.
2. At the product level, AMs must structure clearly defined products, "Me Too" products in an ESG coat will quickly become shelf warmers. The SDGs are the universal starting point here; EU regulation must now be anticipated and/or implemented.
3. “Greenbashing" with the accusation of "greenwashing" does not help anyone, is always simple and often presumptuous. It is always better to achieve adequate returns with noble motives – that is always convincing.
For institutional investors and all other stakeholders, it is high time to professionalize their ESG processes or even to set them up in the first place, also against the background of the materialising EU regulation.
Above all, something has to be done, Corona is a completely unsuitable sedative – let's not listen to the wrong lobbyists who are calling for a breather in terms of "ESG" in these difficult times, thus risking that we all run out of breath in the long term. Schumpeter would have been an ESG champion.
Thomas A. Jesch will be speaking at IM|Power, featuring FundForum International next month.