7 questions about ESG Investments

Many investors are looking for investment opportunities that not only have good returns, but also benefit society. ESG investing is one way to achieve that. But what is it exactly? And what counts as a ‘good’ ESG investment? Chief commercial officer Bob Hendriks and sustainable investing analyst Margot Seeley from ABN AMRO Investment Solutions (AAIS) tell all.

“AAIS is an asset manager and subsidiary of ABN AMRO Bank. AAIS manages the ABN AMRO investment funds, including the ESG funds that Guided Investing clients can invest in. AAIS specialises in multi-management. That means we work closely with external asset managers that we have personally selected. As delegated portfolio managers, they’re in charge of selecting the underlying investment instruments like shares or bonds. However, they have to follow our preferences and guidelines, including in terms of ESG.”

“ESG stands for Environmental, Social and Governance. ESG investments look at two sides of the investment equation: the financial aspects and the ESG aspects. They’re based on a company’s performance score for those aspects. How is a company taking steps to reduce carbon emissions, water usage and the amount of waste it generates? Does a company make sure working conditions are safe and pay its employees a fair wage? Is the company involved in political lobbying and, if so, does it have a transparent policy on this?

It’s important to remember that ESG investments are very different from sustainable investments. For an investment to be considered ‘sustainable’, it must contribute substantially to at least one environmental or social goal and not cause significant harm to any other environmental and social goals in the process. Investing in wind turbines, for example, is a positive contribution towards an environmental goal. But if these wind turbines are installed in a nature reserve, they’ll have an adverse impact on biodiversity.”

“We need to gather a huge amount of information on a company to work out its ESG performance score. As mentioned, we work closely with many external asset managers. Ideally, they should have been established specifically to make ESG investments and have years of investment experience. They use qualitative and quantitative analyses to assess an investment’s ESG criteria. We monitor the managers and, if needed, ask them to take their analysis a step further.

The quantitative analyses can be based on information that a company has reported, such as its environmental, social and HR aspects, board diversity, and its policy on human rights and corruption. This data could specifically be about carbon emissions, waste, water usage, donors, sponsors, lobbying and so on.

For the qualitative analysis, our external asset managers conduct their own research to assess an investment’s ESG profile. Although each manager has their own working methods, they usually ask questions like what are the major risks and opportunities in relation to the underlying sector and industry? What is a company’s environmental impact? How does it treat the people who work there? Is it on good or bad terms with local communities, clients and suppliers? What is the company’s corporate governance policy and how is it applied in practice? How well does the company manage risks? Simply put, every aspect of a company is examined.”

“It’s not easy to say, as there’s no standard measurement. You can use various methods and calculations to work out a score, but then the scales underlying those scores might be different. That makes it difficult to compare scores calculated by different organisations. The result also depends on the quality of the data used. That data can often tell us about the past and present, but not about the future. That’s why it’s important to look beyond widely available ESG data and scores and concentrate on what matters: an investment’s ESG potential. That potential can be shown by a company’s plans, whether they’re achievable and whether they could go a step further. Basically, we’re looking to form an opinion on a company’s future ESG performance.”

“Yes, AAIS maintains and monitors an exclusion list. The exclusion list automatically applies to controversial countries, controversial weapons, companies that don’t comply with one or more of the Ten Principles of the UN Global Compact, tobacco growers and tobacco producers. The investment funds marked as ESG and sustainable undergo stricter screening. For instance, we might exclude companies that derive over 5% of their revenue from gambling, recreational cannabis, fur farming or producing adult entertainment.”

“Yes, shareholder engagement is a powerful tool to stimulate positive change. We ask delegated portfolio managers to uphold our engagement guidelines and report to us every year. They are the ones responsible for engagement, as the specific engagement targets depend on the investment strategy chosen and the role ESG plays in that choice. Besides that, we believe successful engagement relies on having a profound knowledge of the companies in your portfolio and a mutual willingness to become long-term partners. That’s the key to making a difference.

We try to make a different for various ESG aspects. For instance, we opened up talks with a steel producer who had a large carbon footprint. Working together with them, we set emissions reduction targets and agreed that the company had to report on progress – no ifs or buts. Another example, from our delegated portfolio manager and other investors, were talks with a clothes manufacturer in China. The manufacturer shut down its Chinese operations early after our manager and investors engaged with it on human rights.”

“ESG investing has hugely increased in popularity in recent years, so much so that it’s now the norm for ABN AMRO Guided Investing. We expect this will be the case for all investment products at some point. More and more people are concerned about the effect of their investments on things like the environment and human rights. Thankfully, there’s a growing number of investment options to put minds at rest. Although, as said, some things could be improved further, it’s great to see this positive trend.”

More information about ESG investments is available to clients of ABN AMRO Guided Investing: Guided Investing and Sustainability.

Opinions were valid at the time of the interview and may change over time.

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