Asset managers urged to adopt in-house ESG methodologies for superior returns

Low correlation between ESG ratings complicates their use for investment decisions

Asset managers should not rely on third-party ESG ratings and need to apply in-house methodologies to be able to achieve optimal returns from responsible investments, panellists have said.

Speaking at the Sustainable Investment Forum Europe 2020, organised by Climate Action and UNEP FI, Jeroen Bos, head of specialised equity and responsible investing at NN Investment Partners, said that ESG data has been a challenge so far, which is reflected in the low correlation of scores and ratings.

Additionally, he explained that “it is very tough to put sustainability in simply one number”, and that “ESG scores and ratings, we all need to realise, is more an opinion than a fact”.

Bos said that, for example, one methodology can prioritise climate factors, while another focuses on the social side of sustainability.

See also: – PRI warning: ‘Don’t rely on ESG ratings alone’

“You need to do the work to see what is behind the data. You have to [do] the analysis and the work, but if you do that well, it really improves your financial performance,” he added.

Bos especially highlighted the importance of identifying material ESG factors that impact the long-term cash flow generation and profitability of a company and improve investment decision making.

Going beyond numbers

Olivier Rousseau, member of the executive board at the French pension reserve fund (FRR), said that the difficulties in measuring ESG “remain enormous”.

He suggested that active managers are better suited to tackle the challenge, and go above and beyond the ESG scores than passive managers are able to.

“It is not enough to look at the scores provided by off-the-shelf measurements and the passive replication based on such scores is potentially fragile,” he noted.

Active management also increases ESG returns through engagement.

Bos explained that, through conversations, the asset manager helps steer companies in the right direction while fulfilling its fiduciary duty. Engagement can help a business improve its disclosure and reporting.

Given the incongruence of ESG scores, the moderator asked Rousseau whether there is a need to create regulated and globally harmonised ESG ratings.

Rousseau replied that current methodologies should not be freezed by public authorities, but that the market, including NGOs and academia, need to find better responses.

Yet, he emphasised, as European ESG rating agencies have been bought by American institutions, that it would be highly important that Europe nevertheless keeps control of its ratings to ensure these represent European views, which may differ from the ones in the US.

Increasing return with ESG

Faced with a lack of suitable ratings, Luc Olivier, fund manager at French asset manager La Financière de l’Echiquier (LFDE), highlighted that investors need to have their own ESG methodology.

Pointing also to an LFDE study, he said that the long-term risk return profile of businesses is superior in responsible investment.

Katharina Lindmeier, responsible investment manager at Nest, explained that the UK pension scheme partnered with UBS Asset Management and developed a passive quantitative climate strategy for ESG integration to avoid high fees of active managers.

She also explained that low-cost investment opportunities have opened up with the development of the EU benchmark regulation, which allows investors to integrate climate change goals in passive investments.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...