When BP and Royal Dutch Shell announced plans to slash billions of dollars off the value of their assets this summer in response to the coronavirus pandemic and climate change, many of their biggest shareholders were sanguine about the hit. Indeed, the writedowns followed calls from scores of asset managers who have doggedly pressed the oil companies to set targets to reduce carbon emissions and recognise the financial impact climate change could have on their operations.
Investors argued that until climate change was factored into the financial calculations of the companies, they had no way of knowing their long-term value. It was this pressure that in part prompted BP and Shell to announce respective writedowns of $17.5bn and $22bn in June as they warned that the pandemic had accelerated the transition to a world of lower carbon and lower oil prices. “[Asset managers] have certainty been very vocal, putting forward resolutions and negotiating with the oil companies [over global warming],” said Rupert Krefting, head of corporate finance and stewardship at M&G Investments, the UK asset manager.
The fund industry’s emergence as climate warriors coincides with the rapid growth of environmental, social and governance investing, an offshoot of fund management that aims to look beyond traditional financial metrics.
Prominent investment figures including BlackRock boss Larry Fink
have advocated the importance of investing sustainably while warning of
the dangers of global warming and bad corporate behaviour to financial
returns.
Although the investment industry’s new focus on ESG has been viewed with much scepticism, with regular accusations of so-called greenwashing, companies across the world are now feeling pressure from shareholders like never before over issues as diverse as global warming to human rights.
“ESG has exploded,” said Mr Krefting. When he joined M&G four-and-a-half years ago, “no one really knew what ESG was, but now it has really blown up. Suddenly ESG has become front and centre of everything we do.”
Even the most sceptical of fund managers are beginning to pay attention to ESG issues, because of both regulatory and investor demands, industry figures say.
In search of investment products that do good as well as generate returns, pension funds and retail investors in recent years have flocked to ESG investing. Almost every request for proposals, which asset owners such as pension funds send out to solicit asset managers to bid to oversee their cash, now includes questions on ESG, said Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, a UK-based fund house. “The interest in ESG from our clients is growing exponentially.” Despite the pandemic, assets in sustainable mutual funds globally reached an all-time high of $1tn during the second quarter — up 25 per cent on the first three months of 2020, according to Morningstar, the data provider. In contrast, assets across all mutual funds globally increased 13 per cent to $35tn.
At the same time, the rise of ESG has also been bolstered by new regulations. While the US is currently weighing up restricting the use of ESG in retirement investing, in the UK, pension funds now in effect have to consider sustainability issues.
In Europe, the EU’s landmark sustainable finance package, which is due to come into force in March 2021, will put investment funds under scrutiny like never before while also pushing asset managers to incorporate ESG risks into their decision-making process. “[The new EU rules] have shocked everyone into action. Before them, you could get away with knocking out nice marketing documents of polar bears and telling a nice story. What the regulation has done has forced you to focus on the outcomes — you can’t rest on marketing, on story telling. You have to demonstrate and commit to actual tangible action,” said one senior figure at a large UK fund manager.
Alongside this, there is a growing investment case for sustainable investing, said Jonathan Bailey, head of ESG investing at Neuberger Berman, the US asset manager. He argues that while there had been a view that ESG meant giving up returns, a growing body of research suggests this is untrue. “People are realising that sustainable strategies are going to perform very well,” he said. As demand increases for ESG, asset managers have hired new staff and launched new funds. Even the pandemic has not slowed growth. In Europe alone, fund managers rolled out 107 new sustainable funds in the second quarter, Morningstar figures show. “There was some reactionary comment that this [pandemic] would be the death of ESG,” said Mirza Baig, global head of governance at Aviva Investors, with companies focused on short-term survival rather than ESG issues such as climate change.
“But in reality [the pandemic] was a wake-up call for those who weren’t looking at systemic issues,” he added.
Jan Erik Saugestad, chief executive of Storebrand Asset Management, the $91bn Nordic asset manager, said he believed the trend for sustainable investing was likely to become “even stronger” as the world emerged from the pandemic. “We need a balanced recovery,” he said.
With many asset managers now vocal advocates of ESG, companies are feeling the pressure from shareholders.
In just a couple of years, many European oil companies have gone from largely not discussing climate change to setting an aim to become carbon neutral and considering it in their financial statements, said Mr Krefting. Elsewhere, companies such as BHP Billiton have announced plans to ditch coal, after pressure from shareholders as well as governments and climate activists. Despite this, there are signs that shareholders continue to grapple with balancing ESG considerations with investment decisions.
This summer many asset managers who were well-known champions of investing sustainably were found to have invested in Boohoo, the fast-fashion retailer accused of supply chain issues.
Still, Ms Hamilton Claxton said, the rising interest in ESG was driving huge change in the investment industry, forcing asset managers to think differently about investment decisions, discussions with companies and how to measure their work. And this will mean big changes for the companies they invest in too.
“ESG is really driving a fundamental change in asset management,” she added.
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