Investors must incorporate impact considerations as a key variable in their strategies as traditional portfolio-management theories become dated in the post-pandemic world, according to Rodolphe Bocquet, Qontigo’s Global Head of Sustainable Investment.
“We cannot think about the world of tomorrow in the same way we thought about the world of yesterday,” Bocquet said during a panel at the Sustainable Investment Forum Europe 2021 on April 20. “The traditional risk-and-return framework is outdated. It needs to be updated with a third dimension: societal impact. Therefore, new efficient frontiers within these three dimensions will have to be defined by investors.”
The panel’s topic was ‘Intelligent ESG,’ and participants debated whether sustainable investing would become the new norm after the COVID-19 pandemic. Panelists were in full agreement: sustainable considerations have seen a turning point following the events of the past year, they argued, and predicted that ESG criteria will increasingly be embedded into investment practices.
“Sustainable investing is a new continent that will be more widely explored,” Rodolphe said. “And to be able to navigate properly this continent, within fiduciary duty, financial materiality questions, ESG data and regulatory disclosure, you need to upgrade your instruments.”
“At Qontigo, that is what we are trying to do: to help investors find their new efficient frontier,” Rodolphe said. “We are quite unique in that we bring analytics and indexing capabilities. We offer an open architecture on ESG data, we provide strong optimization capabilities, and, thirdly, we have a very customer-centric focus to enable clients to precisely have the exposure they want in terms of risk, return and impact.”
The panel was moderated by Karen Shackleton, Director at Pensions for Purpose. Also taking part were Annemieke Coldeweijer, Co-Lead Portfolio Manager at NN Investment Partners; Joel Prohin, Head of Investment Management at Caisse des Depots; and Heike Reichelt, Head of Investor Relations at the World Bank.
The panelists highlighted the strong growth seen in ESG assets under management, which has accelerated as a result of the pandemic. This trend has been accompanied by more scrutiny from investors on their investee companies’ operations and deeper engagement with boards, the panel said.
The growth of the ‘S’
One of the biggest effects of the health crisis has been a larger emphasis from investors on societal aspects, the panel said.
“Before the pandemic, our conversations with investors who were interested in ESG really focused on the E,” said the World Bank’s Reichelt. “Clearly, climate risks are still the challenge of our generation, but the pandemic has brought the S onto the forefront as a risk factor. Thinking about Rodolphe’s efficient frontier, I think that analyzing the S also has a place in finding the so-called sweet spot for investors.”
“S is very critical,” said Prohin of Caisse de Depots. “We do benefit on the E issue of a very simplistic indicator,” which is carbon footprint. “On the S issues, currently we lack this kind of indicator” that adds “visibility and credibility. But it will come sooner or later.”
How to collectively regulate impact measurements
Other topics that were touched upon were efforts to standardize sustainability labelling and metrics, and the need to avoid ‘greenwashing.’
“As sustainable investing becomes the new normal, there is a need for a robust framework providing alignment, transparency and liquidity,” Rodolphe said. “But in some instances, too many and uncoordinated initiatives may be counterproductive.”
At Qontigo, “we see impact as the future of sustainable investing,” he added “But defining standards is challenging. The best way forward is to rely on collective intelligence.”
Rodolphe reviewed two initiatives where Qontigo is participating. These are the Sustainable Development Investment Asset Owner Platform (SDI AOP), which is developing a taxonomy to measure companies’ contribution to the United Nations’ Sustainable Development Goals (SDGs), and the World Benchmarking Alliance.
“We see the World Benchmarking Alliance as the gold standard to measuring companies’ ability to transform economic systems towards delivering SDGs,” Rodolphe said.
New benchmarks for a new world
Finally, Rodolphe argued that if COVID-19 will act as a turning point in sustainable investing, policy benchmarks should account for the change in paradigm. Central to this change is the adoption of benchmarks that reflect “the low-carbon economy that we want for tomorrow” rather than yesterday’s carbon-intensive economy.
In that sense, he singled out the European Union Climate-transition Benchmarks (CTBs) and Paris-Aligned Benchmarks (PABs) as “strong, transparent and regulated” benchmarks for the new era.