The Covid-19 pandemic has accelerated Asian investors’ interest in the integration of environmental, social and governance considerations into investment strategies, according to AllianceBernstein (AB).
David Wong, senior investment strategist and head of Asia business development for Equities at AB, points out that the pandemic is not just a healthcare crisis, but also an economic and social one that has highlighted the growing inequalities in the global economic system.
As a result, he says investors have become increasingly aware that assessing these risks, as well as those of the larger climate crisis, in investment processes is not just something that is ‘nice to have’ but is essential to delivering better risk-adjusted returns.
“We think almost all managers will have to integrate ESG into their strategies to compete,” he says.
Portfolios with purpose
Mr. Wong, who co-chairs AllianceBernstein’s Responsible Investing Steering Committee APAC, explains that the investment manager distinguishes between ESG integration - a values-neutral assessment of the ESG risks inherent to any investment - and sustainable or responsible investing, which it calls ‘portfolios with purpose’, that has a wider social or environmental purpose in addition to delivering returns.
“We integrate ESG into all of our active strategies at AB across different asset classes, but we feel that for investors that want to not only have good outcomes and risk-adjusted returns, but also want to achieve a particular purpose, be it lower carbon intensity or following the United Nations Sustainable Development Goals, portfolios with purpose address those needs,” he says.
AB puts its analysts and portfolio managers at the heart of its ESG integration and investment process.
Mr. Wong explains: “Rather than having a parallel ESG specialist team that has more of a compliance function on the investment teams, we would rather our investment teams be the ones making those decisions about the materiality of E, S and G risks in any investment we make.
“We genuinely believe that integrating ESG well is a source of alpha and risk-adjusted return.”
Innovative online platform
In addition, AB thinks engagements for disclosure or changing corporate behaviour are more effective when they are led by its portfolio managers, as owners, talking to the C-suite.
“We take stewardship very seriously, so we also have our own proxy voting and governance committee that decides how we will vote on all the companies we own in our equities division so we can speak with one voice,” Mr. Wong adds.
In order to maximise knowledge sharing across different teams and increase the impact in its engagement with companies, in 2018 AB launched an online tool, ESight, which shares resources across equities and fixed income.
Mr. Wong explains that while the firm still uses third party ESG services, these are subjective and backward-looking, and by supplementing these with notes from meetings and engagements its own equity and fixed income teams have held with companies, and proprietary ESG ratings, it is able to deepen its insights and provide forward-looking assessments.
AB takes a forward-looking approach when integrating climate change and governance risks into its portfolios.
“We always start by asking what environmental or governance risks are material for companies we own. For example, if a company is a significant carbon emitter, we ask the basic question - what would happen to earnings if it were subject to a carbon tax?” Mr. Wong says.
He adds that on the governance front, it looks for corporate behaviours that are misaligned with shareholder value.
To encourage positive change, it is embarking on a strategic ESG engagement campaign this year, under which its equity analysts will engage with more than 400 companies, focusing on ones that exclude ESG metrics from their executive compensation plans and those without climate change targets or metrics.
“We’ll ask for those metrics to be established in 2021, as we do the same for AB,” he says.
The asset manager is also collaborating with Columbia University’s Earth Institute, a leading institution on climate change, to create a curriculum for its investment teams to help them understand and assess climate risk in the businesses in which they invest.
“We have created the first of its kind partnership to understand policy implications and its impacts on businesses from a variety of consequences of warming, including rising sea levels, extreme weather, and physical risks on businesses and economies around the world,” Mr. Wong explains.
He points out that these changes will create winners and losers, and while fossil-fuel producers will struggle, companies that develop new technologies and services that facilitate adaptation and mitigation, including strengthening physical defences against climate change, will benefit.
Wong stresses that it is important to take a long-term view and think about how all of these factors will impact portfolios in 10 to 15 years’ time.
“By doing this we can not only try to avoid risk for investors, but potentially add some alpha to our strategies as well,” he says.