ESG INVESTING

WHAT IS IT? HOW POPULAR? WHAT EFFECTS ON THE FINANCIAL MARKET?

With the rise of awareness in environmental issues, and the rise in concern regarding global warming in the recent years, investors have started to do what we call “negative screening” when choosing their next investment to try and support actors of the market that make efforts in this regard. This tendency to care about the environmental impact of human activity is very present in Millennials. A survey conducted by BlackRock found that 67% of Millennials wanted investments to reflect their social and environmental values. This number is even higher for women (76%), who are more and more present in the financial sector. There is an increasing demand for sustainability to be considered, and it is starting to re-shape the industry.

For instance, Greta Thunberg and other young activists were present for the 50th edition of the World Economic Forum in Davos for the second year in a row in January 2020.
Some initiatives such as the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact Principles for Responsible Investment (PRI) have been created and have gained significant attraction. The PRI was already endorsed by 200 institutions in 2007, which represented more US$9 trillion in assets at the time, according to the CFA Institute.

In this article, we will not only talk about the environment, but will also consider social and corporate governance issues (ESG).

Considering ESG issues may be a rather recent phenomenon in the global financial market, but it is significant. The Morningstar mentioned a survey designed by the Harvard Business School that showed outstanding results: more than 80% of asset managers now consider ESG issues when making investment decisions.

An example of how ESG impacts global financial markets can be the social conflicts and corporate behaviour of Uber. The company generates revenue thanks to drivers working as independent contractors. Working under this status meant living in rather precarious conditions for the drivers in question as the company would not have to grant them basic labour rights as defined by the law. These rights include unemployment insurance, health care subsidies, paid parental leave, overtime pay, paid rest breaks, or being paid at the guaranteed minimum hourly wage for example.

This led to strikes and major legal battles between the company and its drivers such as the infamous O’Connor vs. Uber class action lawsuit that lasted for 6 years. The company also spent enormous amounts of money on lobbying setting its fifth federal lobbying spending record in 2018.  According to an article published by Bloomberg on April 4th, 2019, the company spent $2.3 million to win approvals for innovations such as self-driving cars and to ensure its drivers maintain their status as independent contractors, a strategy to clear their image and resolve conflicts before their IPO in May 2019.

These efforts were apparently insufficient as investors lost about $650 million in the first day of trading, as the value fell 8% below Uber’s listing price (one share being priced at $41.29 at the end of the day). The Economist even published an article saying  “some have called it the worst initial public offering ever” a couple days later. Although other elements have contributed to this failure, we believe the poor leadership of the company which led it to be labelled the “world’s most dysfunctional” start-up must have played a role.

This example demonstrates how ESG elements can have an influence on the performance of certain companies on the financial markets.

Large institutions in the finance industry are therefore developing strategies, funds and tools to remain attractive for ESG considerate investors, with a standout example being our association’s partner, Bloomberg.

Bloomberg is a well-known and key provider of essential business and finance information. They dominate the industry with their dynamic network and quality work delivering business and financial news and insight around the world.

Bloomberg took action for the environment when they designed and built their new Head Quarters in London. The architecture of the building is very modern and has received the RIBA architecture prize in 2018, a prestigious award regarded internationally as a mark of excellence that has been celebrating outstanding creations for 180 years.

Innovation was also at the heart of the building project. The ceiling, for example, is composed of 4,000 panels made of 2.5 million sand coloured petals and 500,000 LEDs and was designed to efficiently light up the building while consuming 40% less electricity than a traditional office would.

The building also generates its own power that is used to heat offices in the winter and cool them in summer seasons, leading to an additional 35% energy consumption reduction. The world’s most sustainable office design prize winner also reduces water consumption by up to 73% thanks to a system of rainwater collection, grey water recycling and vacuum flush toilets.

The location of the building is also unique. Built on the ruins of the roman temple of Mithras dated from 240 AD, Bloomberg has restored the ruins and made it a gallery open to the public. The gallery displays more than 14,000 artefacts from pieces of leather sandals, to writing tablets and brooches.

The company also developed a new section on their website, Bloomberg Green, which is solely dedicated to the environment. In this section, customers can find generic data such as the constantly up to date number of “Parts per million CO2 in the atmosphere”, the most polluted city in the world (updated every day), annual figures for the greenhouse emissions, quantity of ice in the arctic today versus the historic average, etc. The page also gives them access to articles dealing with sustainability, energy, or pollution matters. For example, one of the headlines of the week was an article about seven new ETFs that began trading in Canada and are aimed at investors who want to incorporate ESG issues in their portfolios.  

In addition, Bloomberg collects ESG data from more than 11,500 companies in 83 countries and added interesting analytics tools and functions to their terminals to help clients treat it. Here are a couple examples of such functions.

ESG <GO>

This function gives customer a summary table that compares the company of their choice to its peers in the three main ESG domains: Environment, Social, and Governance. This tool also enables customers to know if the company improved its performance over time. The additional figures customers can access thanks to this function can also be interesting for them to get a better idea of the company is doing ethically speaking. The function also returns grades and rankings (sustainability rank, Bloomberg ESG Disclosure, etc.) that can help them put the company’s performance into perspective.

There are similar functions such as the FA ESG <GO>, that provide relevant data in more details for the three pillars of the ESG framework in different tabs ; RV ESG<GO>, which enables you to compare a company’s figures to others in the same industry, or BFGEI Index (Bloomberg Financial Services Gender-Equality Index) , which corresponds to a gender equality index created by Bloomberg’s Financial Services, etc.

Screening tools:

As mentioned at the beginning of our article, many investors now use negative screening with ESG criteria to eliminate some assets of their list of potential investments. Bloomberg helps investors through this process with tools such as EQS<GO> for equities screening, or SRCH<GO> for bonds. These functions are screening tools that enable customers to create a list of assets following certain criteria. For instance, customers can chose the index in which the asset should be traded, they can eliminate some sectors (such as the oil and gas industry if they want to avoid investing in non-renewable energies), and can tailor their list as much as they desire by adding custom criteria (setting the Beta above or below a certain value, asking for a certain dividend yield, setting the currency, etc.).

Bloomberg has fully embraced the ESG wave, but they are not the only ones. Many large financial institutions and issuers start acting to attract investors with ESG concerns.

BlackRock, for example, holds some of the largest ETFs with ESG concerns in the world which are worth billions of US Dollars. Since these products are getting more and more attractive, plenty are issued every year to face the increasing demand (c.f. Bloomberg article that we referred in the Bloomberg Green section).

Source: ETF.com

There are large Cap ESG Mutual Funds that are also valued at billions of Dollars such as the Parnassus Core Equity Investor, managed by Parnassus Investments and which’s assets are worth over $17.5 billion ; the Jensen Quality Growth Fund Class J (JENSX), managed by Jensen Investment Management which has one of the higher sustainability scores from Morningstar; the American Funds American Mutual Fund Class F-1 (AMFFX) which aims to stay away from the alcohol and tobacco industry specifically, and has holding worth close $59 billion.

We have also witnessed a large rise in popularity of green bonds, or bonds raising funds for projects which deliver environmental benefits. Although green bonds are not exactly a new phenomenon, the first issuance by the World Bank dating from 2008, they are becoming a significant segment of the bonds market. According to an article in The Balance, green bonds issuance in 2017 was $155 billion. Estimations as of February 2019 for the year 2018 were an increase of this figure to over $250 billion. French and European banks were leading underwriters of green bonds in the first quarter of 2017.

To conclude, ESG investing is the process of considering three main dimensions (environment, social, and governance) when composing a portfolio and is a way to measure the sustainability of our investments.
ESG investing is getting very popular. The proportion of professional asset managers who now consider these issues (80%), as well as its attractiveness to future generations of investors speaks volume.
Its popularity has even started to re-shape the global financial markets as we see the emergence of more and more assets (ETFs, Mutual Funds, Bonds, etc.) being created specifically to follow strict ESG guidelines and conditions. It has also lead to considerable efforts from large institutions such as Bloomberg, which take these issues very seriously and act to improve the global economy’s stability.

Florianne ROMANET

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