Mirova CEO Zaouati on the weaknesses of the ESG market

Opponents 'are doing this to continue to do business as usual. But they use arguments that are sometimes irrelevant'

Philippe Zaouati, chief executive officer of Natixis Investment Managers subsidiary Mirova, said he sees valid points in the criticism ESG has been getting in the US. But the current environment provides opportunities to reduce greenwashing and for truly sustainable investment managers to show their worth, he says.

Zaouati recently spoke with ESG Clarity about the firm’s take on sustainable investing and where the business is going.

Tell us a little bit about your background and why sustainable investing is important, personally, to you.

So, all my career has been in asset management. I started 32 years ago, and I was first a quantitative analyst and then a quantitative portfolio manager. So I was part of a lot of engineers who came into the asset management business at the beginning of the 90s. We did good work at the beginning reshaping the asset management business, but then during the financial crisis, I started to change my views and understood that maybe we had gone too far in complexifying the game, and that we should come back to something closer to the real economy – more simple, more easy to understand to everybody. That may be a little bit more boring, but probably more useful and positive for the economy, for the environment and for society.

I started to think about this when I joined Natixis in 2007 – it was just a couple of weeks before the financial crisis started. And then I started to look at how we could integrate sustainability as the core of our positioning. It was early stages – it was really difficult to implement this at large scale at that time. So, we decided to start a kind of proof of concept I would say – and Mirova is this proof of concept. We started Mirova at the end of 2012, so we are going to celebrate the 10th anniversary of its creation in November.

How does Mirova integrate ESG? Is sustainability a theme in all of your investment options?

We have created a company to do this. This is our DNA, our mission. We want to add environmental and social impact into all we do, all our decision-making processes. We do it for a lot of other asset classes and from listed equities to investments in private equity and land restoration and mangrove restoration. It’s a very broad spectrum, and there is a high conviction in what we do. We have a very strong team of 20 people working only on ESG analysis.

What we do is investing in sustainability. We invest in companies, in projects, that we find that we think will have a positive impact on society and the environment.

Does that mean you don’t include any fossil fuel holdings in your investments? Or do you have an engagement model?

No, we don’t. If I have to explain very simply our investment process, I will say it’s threefold. The first step is understanding the issues at stake. What are the issues – biodiversity, climate, aging population, a lot of different situations that we have to tackle in the future.

Then starting from this, we try to understand what are the solutions that can help solve these issues. And then the final step is to identify the companies best positioned to provide the services and the solutions.

If you go through these three steps, today there is little chance that you find an oil company. It’s not an exclusion process. We do not say that we won’t ever invest in a fossil fuel company. But today, we cannot find any of them. We’ve got a really strong trajectory, of companies reshaping of their business and looking for a world in 2040 with another model – it does not exist. [But] it exists in the utility space. For example, when you see Orsted, for example, they have completely reshaped their business from producing electricity with fossil fuel to renewable energy. We have invested in Orsted for years. But in the fossil fuel industry, per se, [a sustainable model] does not really exist today.

Tell us about the size of your US business and what products you offer.

Globally we manage €28bn. We have teams in Paris, London, Boston but also in Lima, Nairobi and Singapore. We work in developed countries and in emerging markets. In the US, we set up the team seven years ago.

We started with nothing, I mean a couple hundred million euros under management in global equity. Today, we manage $10bn and only one strategy, which invests in large-cap global equity. We distribute this strategy all over the world, but in the US through the Natixis distribution platform.

What potential do you see in the US market? With what’s been going on with the politicization of ESG, but also the potential that we have with the climate provisions in the Inflation Reduction Act, how are you looking at all those things? What does it mean for you as a company, and what might it mean for Europe?

So, of course, mixed feelings, I would say. Because we have all this pushback from a couple of Republican states and also part of the [investment management] business – saying ESG is kind of an illusion. To a certain extent, I would say they are right. That’s the point.

We all know why they are doing this; to continue to do business as usual. But they use arguments that are sometimes irrelevant. Saying that ESG is not clear, that there is a lot of greenwashing in the market. That’s true. So, they use the weaknesses of the ESG market.

We have a very important role to play in that discussion, because we were one of the pioneers. We have the expertise, and we can really explain that we must not throw the baby out with the bathwater. Clearly, it is important to explain that there are different ways to do ESG. And there are some really serious players in this, and that expertise matters, and that data matters.

This is also [an opportunity] to fight against greenwashing.

Of course, on the other hand, there is some positive news. You mentioned, of course, the Inflation Reduction Act, which is really positive for climate investments, renewable energy and so on. This is something we do not do on the private assets today in the US, but it’s really positive for us. We could move into the space, because at least today there is more visibility in this space.

At the same time, there is also the SEC regulation process on ESG, which is a good thing with these three levels of funds. And the only concern we have is that we are going to have a European regulation on one hand and US regulation on the other hand. Today, they do not exchange enough between regulators, and it could lead to some differences that could be very difficult for investors to navigate through.

But it’s good news as well, because now the discussion is on the table. It will help us to position our products more clearly. Not everybody will be able to be ESG focused or ESG impact. We think we will, and so it will be another selling point – so, very important for us.