The growing popularity of ESG equity investing led to a record year of inflows in 2021, as investors put environmental, social and governance factors at the top of their priority lists. With the ESG investment market expected to grow exponentially by 2030, the latest trends in sustainability were front and centre at the BNP Paribas Americas ESG Webinar Symposium in January.
The event brought together ESG advocates from across the financial community, with participating organisations including Waratah Advisors, Dimensional, Invesco, Bank Policy Institute, Engine No. 1, CalPERS as well as index/ratings providers MSCI and S&P Dow Jones. BNP Paribas’ own team of ESG specialists was also on hand to provide their insights.
“The evolution of the ESG landscape and inflows into ESG-related equity products are impossible for institutional investors to ignore,” said Greg Boutle, US Head of Equity and Derivatives Strategy at BNP Paribas Americas. “In the US last year, we estimate that almost 10% of net Exchange-Traded Fund (ETF) inflows went into ESG-related ETFs. This is a trend that is likely to accelerate in 2022.”
The evolution of the ESG landscape and inflows into ESG-related equity products are impossible for institutional investors to ignore.Greg Boutle, US Head of Equity and Derivatives Strategy, BNP Paribas Americas
How are buy-side managers approaching the “S” and the “G” in ESG?
Providers have seen an overwhelming majority of investors focused on the climate side of the ESG space, particularly in the wake of the recent COP26 climate summit. It’s therefore unsurprising that the “E”, related to environmental factors, gets the lion’s share of focus on the buy-side, with “S” uptake remaining the more challenging of the three components. One difficulty highlighted by panelists is that addressing social inequity requires large investments in infrastructure. This in turn relies on building materials such as cement and plastics, which are among the largest contributors to greenhouse gas emissions. The rise of carbon-capture technology was noted by many as a viable means of tackling this kind of conflict.
What is the role of the major indices with respect to ESG?
Experts also looked at the various opportunities and challenges in defining ESG from an index-provider perspective. “Flagship” indices such as the MSCI USA ESG and S&P 500 ESG, as well as the S&P Europe 350 ESG index, remain highly popular, as they offer a risk-return profile that is already familiar to investors using standard benchmarks. This is helping to make it easier for clients of all sizes to manage their ESG exposures. A low-carbon index can help firms manage transition risk when employing disruptive new green technologies, while simultaneously mitigating stranded-asset risk.
What are the benefits of a collaborative approach to ESG engagement?
Participants strongly advocated that investors continue to actively communicate with companies, whether it’s providing timely disclosures around diversity and inclusion, the rate of emissions reductions or other aspects of ESG. This type of ongoing dialogue is very important, as it allows companies that are properly managing their workers or are diligent about achieving net-zero status to be identified as leaders rather than laggards. While a more forceful activist approach is required in some instances, constructively engaging with carbon-intensive firms to push through faster adoption and implementation of renewable strategies can have a tremendous long-term impact on a company’s value.
What kind of progress has been made on the adoption of sustainable strategies?
The BNP Paribas ESG Global Survey 2021 found that more than half of global respondents considered ESG essential to their ongoing investment activity, including some twenty-two percent that are incorporating ESG across the majority of their portfolios on an integrated basis. This is a jump from just two years ago: in the 2019 edition of the survey, not one respondent envisioned ESG activity across a broad array of portfolios, but rather focused on a subset.
Respondents also noted the ongoing role of banks in helping clients achieve net-zero aligned portfolio investments, as well as facilitating sustainability-linked financing on behalf of transitioning businesses. Additionally, many asset managers are re-thinking the concept of divesting, and instead working to drive change among industry laggards.
How might regulation affect corporate transition plans?
Experts are keeping a close eye on potential changes to net-zero transition plans, and whether public statements from companies about ESG adoption are credible. To that end, going forward it is likely that regulatory posture will become more aggressive and corporations will have to demonstrate that a specific plan is substantive rather than aspirational. Panelists hoped the increased scrutiny would not have a chilling effect on firms that are earnestly trying to accelerate their ESG ambitions.
What can be done to address discrepancies in ESG ratings?
No matter the approach to ESG, panelists agreed that an investment strategy is only as good as the data supporting it. A central issue has been a lack of ratings consensus, with even very well-researched mega-cap companies scoring high marks from some agencies yet ranked near the bottom by others. Such discrepancies can result from using different indicator types, as well as differences in how these indicators are weighted and assessed as part of the ratings process. This puts the onus on providers to take a truly focused approach to ESG scoring, using data that is fully measurable, quantitative and reliable.