ASW is realigning its offering to meet the expectations of a new generation of clients
Structuring the offering to meet the expectations of a new generation of clients
ASW's first steps in the field of sustainable investment, in other words managing assets that take environmental, social and governance (ESG) criteria into account, date back to 2012
We’re on the threshold of seeing a transfer of assets from one generation to another. The next generation has grown up discussing environmental issues.
Which of the different sustainable development approaches does ASW favour?
Daniel Mead: Sustainable development and responsible investing are values that have the support of all ASW employees. These topics affect all our business lines.
More recently, our commitment to sustainable finance has been extended to all our investment strategies. For the past three years, we’ve been committed to an approach aimed at ensuring that all our management activities benefit from the expertise we have developed, though initially that was limited to environmental or best-in-class management.
These days, our efforts are increasingly focused on sharing our ESG expertise across ASW. Of course, ESG remains an important part of our development strategy, but it must benefit our entire business. My team is leading these efforts as part of a programme that aims to ensure ESG criteria are systematically taken into account in all our investments, both on the bond side, in equity management and trading environments.
To what extent do conventional investments have to integrate ESG criteria?
Our objective isn’t to turn all our funds into theme or best-in-class funds. There’s an analogy to the automobile industry, where manufacturers are producing electric, hybrid and conventional vehicles, each designed to fulfill different client needs. Environmental funds are comparable to electric vehicles, best-in-class funds can be compared to hybrid vehicles, and four-fifths of the total sales are still made up of conventional vehicles – in other words, conventional management but with ESG criteria integrated into investment processes in an increasingly formalised and structured way.
“We launched an initiative urging major index providers to exclude companies involved in controversial weapons from conventional indices.”
Some approaches, such as exclusion, seem to be easier to apply than others. To what extent do you have to take this difficulty into account?
There are common denominators that are applied throughout ASW. This is true particularly for controversial weapons, which fall into five categories – anti-personnel mines, cluster munitions, chemical and biological weapons and nuclear weapons from countries that have not signed the Non-Proliferation Treaty. As a consequence, today, in an approach that is applied consistently across our company, ASW excludes around sixty companies involved in controversial weapons.
Is it true then that ASW has even joined an initiative with global index providers?
Almost a year ago, in keeping with this commitment, we joined an initiative urging major index providers to exclude this type of companies from conventional indices. We’re not talking here about ESG indices or specialised indices which, of course, already offer this type of possibility, but standard indices such as the MSCI World, the S&P500 and other market indices used by the vast majority of investors. The initiative is now coordinated by SSF and has already gained the support of around 170 institutional investors, representing more than USD 9 trillion.
“As for the best-in-class approaches, the experience has also been positive for equity funds, especially in times of market downturns owing to the defensive nature of ESG strategies.”
In the light of this, and based on your experience, what impact is ESG investment having on the financial performance of investments?
It all depends on the management approach. In thematic management, in particular environmental theme funds that invest in sectors where growth is around twice that of the remaining economy, overall performance outstrips that of the major market indices. Today, these green strategies are the ones with the longest track records. In the short term, they can obviously be more volatile during specific market cycles. But, overall, the experience with these strategies has been very positive.
What about the best-in-class strategies?
As for the best-in-class approaches, the experience has also been positive for equity funds, especially in times of market downturns owing to the defensive nature of ESG strategies. In credits, the first results are encouraging, although the information is insufficient as ASW's strategy was launched only a year ago.
And what progress is being made on the integration of ESG criteria?
When it comes to integration, the impact on performance is more difficult to quantify as the aim of the operation is to fully integrate ESG factors – climate factors, governance, etc. – into the fundamental analysis of securities. This makes it more difficult to measure the impact of each of these criteria in relation to the financial analysis factors. That’s because the two dimensions are part of a whole. That said, anecdotally, analysts and portfolio managers see real added value in the ESG factors because they provide a complementary perspective compared to the most widely used financial analyses, from which there is a surplus of information. In ESG, meanwhile, information is often more qualitative and less well covered by financial analysts and rating agencies. This is especially true as we are still in a learning phase when it comes to the methodologies to be used for the integration process: How should it be integrated into valuation models, etc.?
“Today, demand comes from both institutional and private wealth managers.”
According to a recent analysis, even though Europe has often been a leader in ESG investment, the country seems less advanced when it comes to engagement?
We formalised an engagement process more than a year ago, whereas this process was previously carried out in a less formal way. The approach, which is applied across ASW, is currently led by the trading team and seeks to establish a dialogue with the problematic companies whose securities we hold in our portfolios. The dialogue is conducted either directly, through shareholder coalitions or with the help of specialist service providers. Last year we initiated this type of dialogue with more than 40 issuers through different channels.
Engagement is interesting for another reason. It encourages closer cooperation among different management teams invested in the same security. Especially because, as you may know, management teams each tend to do their own thing. That’s the reality. Addressing the issue of problematic companies whose securities are held by several management teams gives the teams a chance to exchange views and can produce interesting results.
What is the main source of demand in Europe for the ESG investment approach? Is it mainly pension funds or wealth management?
Today, demand comes from both institutional and private wealth managers. Among institutional investors, foundations have shown particular interest, especially those whose purpose is more or less closely linked to sustainable development as well as humanitarian and environmental causes. These types of investor have relatively specific demands. But more broadly insurance companies as well as pension funds and schemes are becoming more involved. At the same time, advisory firms are refining their approach.
“We reckon that 65% of our assets under management formally integrate ESG criteria.”
There’s also a general trend towards creating solutions tailored to meet the expectations of a new generation of clients. I think we’re on the threshold of seeing a transfer of assets from one generation to another. The next generation has grown up discussing environmental issues, which wasn’t the case for their parents. This shift is giving rise to new expectations in terms of investment offerings and solutions.
In areas such as these, I feel we need to use common sense and say that, of course, climate change is a reality. The frequency and intensity of extreme weather events is going to increase. We must be prepared for these new circumstances.
What has been the trend in AuM managed according to ESG criteria at ASW?
We reckon that 45% of our assets under management formally integrate ESG criteria. The extent varies depending on the teams, as there’s no perfect homogeneity, but our programme covers most of our assets under management. In the asset categories that follow a stricter ESG approach, whether in thematics, environmental, best-in-class management or multiple exclusions, our assets under management have increased significantly over the past two years and reached more than GBP 500m as at the end of August 2020. However, the exclusion of controversial weapons extends to all our assets under management.