Ahead of the last session of the day, the summit’s chair, Dylan Emery from Last Word, asked members of the audience four key sustainability questions in a bid to determine how important ESG was to them and their clients and how their approach was changing.

How far through the ESG integration
process are you?

What would you do if a fund manager does not engage
with ESG criteria at all?

Select each of these you agree with - a significant number
of my clients are concerned with...

Select each of these you agree
with - sustainable investing…

Last Word’s Dylan Emery went on to ask further questions around the development of ESG and sustainability from three very different experts: Leon Kamhi Head of Responsibility at Hermes, Michaela Seimen Howat Sustainable Investing Strategist at UBS, and Jake Moeller Head of Lipper UK & Ireland Research Refinitiv.

Jake Moeller said: “It’s not an easy question to answer. Once upon a time it was easy to gauge, you could just run an ethical screen on funds. But more recently we’ve been trying to identify funds with more amorphous objectives. Despite this we are seeing huge growth, as Dr Walker alluded to earlier there has been growth of 17% into ESG funds in the institutional space this year. Our retail analysis shows retail funds have seen an increase of 14% this year.  

More importantly from a buyer’s perspective, 2018 hasn’t been such a good year for fund flows across Europe compared with last, but the proportion of ethical ESG or SRI type funds has increased from 12% to 35% of total spend. This is really good for manufacturers since it says that in times of difficulty, the people who are buying ESG / ethical investments, are good at maintaining steady inflows, even if the whole market isn’t putting a lot of money in.”

Michaela Seimen Howat said: “When we started creating diversified portfolios, one of the biggest issues was being able to find the right product. But we are now seeing new products emerge on a daily and weekly basis and this is very encouraging. It’s important to consider the outcome you want and what you want to achieve. Clients ask us about the impact, the reporting, the transparency, and what is really achieved. A lot of funds have a sustainability tag but what’s underneath isn’t always clear.”

Michaela Seimen Howat said: “it’s difficult to say – there is a big challenge because people speak different languages. As a wealth manager I am quants and story driven. Asset managers have different drivers. We are looking at returns and risk management, but if they are asked about their investments they will answer using a language based more on their investment process. The positive thing about ethical and sustainable investing is that the Sustainable Development Goals are a great tool for retail clients. It creates a common language across the industry. They can say ‘I care about 1, 9. 7 and 10’ and this gives us a tool to go to asset managers and say that we need to focus on these particular SDGs.”

Michaela Seimen Howat said: “It’s difficult to say, I would need to speak with everybody to answer that. Sometimes fund managers say they do SDGs, engagement, and ESG, but when we ask a detailed question, we find that there are many different ways of defining these approaches. There is a lot of pressure on us to deliver ESG results. Investors have big expectations, they see glamorous adverts, and think ‘oh great’. But investing in the right funds isn’t always as easy as that.

I would say that more than 50%, are moving in the right direction. The driver for the change is important in determining how far they have got. It might be the regulator, management, an asset or portfolio manager. We like to see whether the driving force is internal.”

Jake Moeller said: “I think the time for fund managers to pull the wool over the eyes of gatekeepers is over. Any fund manager that tries to use ESG as a marketing tool, will be found out pretty quickly. The negative publicity would be extraordinary too.”

Leon Kamhi said: “We need to make a distinction between feeling good and doing good. ‘Feeling good’ is about investing in a low carbon portfolio or a portfolio with high ESG performance. It’s a static position. ‘Doing good’ is about improving ESG and business performance. It’s about reducing a level of carbon emissions, for example. It is right that clients want us to demonstrate our static ESG rating, But it’s also important to see how that’s changed.

It’s important to assess stewardship too. This doesn’t have to only be on environmental, social and governance issues, in fact we started out engaging on strategy and governance, it can be on anything that demonstrates that the company is acting in the long term interests of  the end investors. I think it’s really important for clients to understand how the fund manager is stewarding the company and to what effect.”

Jake Moeller said: “Standardisation of the universe is key. You can’t just compare ESG funds as one amorphous block and standardisation would ensure that all fund and data providers are putting a lot of work into the figures being released. Ultimately the best thing you can do is to give as much information to buy side analysts as you can. Fund buyers, pension trusts, and platform providers all have very different objectives. What we need to do is get tools that help them get the information they need.”

Leon Kamhi said: “I think society knows what it wants. There is increasing concern about climate change and inequality and this is affecting policy makers. Ultimately society is the beneficiary and it is going to hold the pension funds to account. The investment industry needs to reconsider its approach which should be about more than simply achieving investment returns.”

Michaela Seimen Howat said: “If you just go to the white pages and scan their engagement / ESG reports they all look fabulous, but what you really need to do is have a conversation with the portfolio managers to understand how integrated the ESG culture really is. Sometimes ESG teams do brilliant work but it might be as an isolated single department within the larger organisation with no interaction on a daily or weekly basis. You have to assess the structure of a company at the outset.”

Jake Moeller said: “There is a big issue with passive investing. We have talked a lot about narrative but if you want to get access to a carbon strategy through a passive investment you’ll probably get access to a company like Exxon Mobil, since it has low carbon density relation to its revenues. There is an inevitable mismatch between what you want and what you can access in a passive strategy.”

Leon Kamhi said: “In terms of the next 10 years, I’ll say three things: data’s going to get really good, stewardship will be massive – much bigger relative to actual fund management than it currently is – and fund manager’s alignment to beneficiaries including its governance, remuneration and fee structures will be scrutinised.”