Launching the ESG & Impact Investment Forum – part 2

Maala International conference 2018

Contributed by: Sagit Porat

Sustainability and impact investing; SDGs; practices and new financial tools in the ESG investing arena; opportunities and challenges

 

Investors engaging with companies view the company as an agent of change. Rather than reacting to change, they ask how they can take a part in creating change in society” Will Pomroy, Hermes Investment Management

 

Podcast:

Main discussion points:
  • The world’s biggest investors are now focused on sustainability issues, because they matter financially and also societally; investors do not operate in a vacuum.
  • There is a shift from ESG to impact, or SDGs, as the concept framework; a shift from risk to opportunities.
  • It is estimated that ESG investment is going to be at least as big, if not bigger, than the mainstream investment market.
  • Investors are engaging with companies to discuss new themes: adjusting business models to a rapidly changing world; the company as a change agent. Engagement is a soft power mechanism that can bring about meaningful change in publically traded companies.
  • The issue of human capital plays a growing role in engagement with companies.
  • There is a rapidly growing market for new financial tools such as green, social or sustainable bonds and loans.
  • There is competition among financial market places for growing sustainable finance as a business. It is the finance industry of the future.
  • There are interesting developments in Israel on social bonds, and more is expected around financing of green infrastructure projects through green bonds.
  • There is real opportunity in the sustainable finance space in Israel, which can potentially eliminate challenges Israeli companies face in typical ESG.
  • Israeli technology and innovation used in the fields of sustainability are of significant interest to international investors.
  • Demand is coming from the client base, and increasingly from the retail sector, and a new generation in big family offices, who are increasingly interested in social impact.
  • Disclosure is a key opportunity for companies to tell their story.
  • Themes that will dominate ESG thinking in the next 5 years: investments to finance the transition to a low carbon economy.
  • The current economic paradigm needs to change. This embodies great opportunities to new companies and challenges established players.

 

Maala International conference 2018. Photo by: Netanel Tobias

 

Speakers

ModeratorItamar Schwartz, Head of Sustainability & Corporate Responsibility Group at BDO Consulting

Hugh Wheelan, Managing Editor at Responsible Investor

Will Pomroy, Associate Director, SDG Engagement Fund at Hermes Investment Management

Heather Lang, Executive Director, Sustainable Finance Solutions at Sustainalytics

 

Discussion:

Hugh Wheelan | Responsible Investor – main points

Hugh Wheelan, Maala Conference 2018. Photo by: Netanel Tobias

Probably the best way of encapsulating what that market is, the UN Principles for Responsible Investments, has 2,000 plus signatories now, $70 trillion in assets. These figures are indicative of the size of the interest in ESG information, and how it drives value within corporations. I think I’ve written hundreds of stories, where you see company share price value drop by 20-30% in a single hit because of a particular, financially related sustainability issue.

The world’s biggest investors now are focused on these issues, because they matter financially. They also matter societally, and investors do not operate in a vacuum. Their decisions matter for the big societal and sustainability questions that we talk about.

Most institutional investors across Europe are seeking much more disclosure of ESG data and contextual information from the companies they invest in; this is business critical information for shareholders. On top of that, in Europe, you have a serious roster of regulatory shifts on ESG transparency. In the States, it’s somewhat different, but it’s also somewhat the same. Big pension funds are looking at the same issues. You have pushback from the government around corporate governance issues debated ferociously. There is also pushback from the Trump administration on the Paris Agreement, but many States respond with their own regulatory pushes. It is a mixed picture, but broadly the same types of trends. Larry Fink, the CEO of BlackRock, recently said the thinks ESG investment is going to be at least as big, if not bigger, than the mainstream investment market. There is no geographical zone that escapes for those issues, and there are no companies that will not be affected.

In terms of technology, Israel is of significant interest to international investors, and I think you see some of those technological innovations increasingly being used in the fields of sustainability: smart metering, energy efficiency, etc. Israel is a small part of most institutional investors’ portfolios. You’re hearing here from companies that have started thinking of sustainability at the heart of the way that they are trying to create new businesses. Investors will be interested in that.

At its core, impact investing is a VC-type investing into small and medium-sized businesses that are 100% sustainable in what they do. We’re starting to see big equity houses in the US launching billion-dollar funds, investing in smaller private markets funds that are financing interesting companies. We’re seeing a lot of interest in Israel around that. And social investing as well, there are interesting developments around social bonds, and you’ll probably see more in the way of green infrastructure projects being financed by debt for particular energy or transportation by green bonds; move from company debt issuance to much more targeted project-finance issuance.

Many financial centers are now trying to attract sustainable investment funds, or the listing of green bonds into those markets. Israel also has to and is thinking about that, as a space for sustainable finance to grow. There’s competition out there amongst financial marketplaces for growing sustainable finance as a business. It is the finance industry of the future.

We have a huge requirement for funding of the transition of our society to a low carbon economy. The money to finance that transition is going to come from partnerships of governments, big multi-government banks, and private investors. There are also interesting themes around sustainability and climate, like changing business models; so circularity, capital idea, where companies no longer sell products, they lease products, and they recycle them.

This is a change of the way the business is thinking about what it does. There are good business opportunities for companies that seize that trend now, and start to think about what a new economic paradigm means. That’s where the businesses of the next 5-10 years will be challenging established players; in fact, they already are. They have done it in the tech sector; they’ll be challenging them across all areas: energy, transportation, etc., will start to see new challenger companies and investors.

 

Will Pomroy | Hermes Investment Management – main points

Will Pomroy, Maala Conference 2018. Photo by: Sharone Amit

Until early this year, Hermes was totally owned by the UK’s largest pension scheme. ESG was always built into what we do, because we are doing it on behalf of those pension beneficiaries, to deliver a return, as well as a world they are going to be retiring into. We manage about $40 billion of assets. We are fundamental stock pickers. We also have a stewardship business that engages with companies on ESG issues, on behalf of about $400 billion under advice – rather than direct management. We’ve been doing ESG integration and shareholder engagement now for the best part of 20+ years.

We have gone from ESG to impact, or SDGs, as the framework that we think about in this concept. There’s a broad recognition that ESG supports risk-adjusted returns. Companies that think about ESG issues are less risky investments. Where we are looking at the Sustainable Development Goals, and the look forward to 2030, is where the UN recognizes the role of the private sector, investment is needed to deliver on those goals. There is a growth element, returns on these investments and the accompanying opportunities. Rather than just thinking about the risk-adjusted part of the ESG, we now think about new opportunities, new product developments that have the ability to appeal to a new customer base and create new markets.

It is a very different approach. After 20 years of engaging with companies, mostly about corporate governance, they are very used to us. They are not so used to portfolio managers having a conversation about adjusting the company’s business models to a world that’s changing rapidly. It is almost having a conversation about how that company is an agent for that change, rather than reacting to that change. The issue of human capital is almost the direct way into the conversation. Because companies are employing people; they are competing over a scarce resource of skilled people. Those employees tend to be their greatest advocates and their connection to society.

There is a lot of innovation that’s happening in Israel. Hermes has a fund looking for pure play companies that are coming up with the innovating solutions to solve a huge range of environmental or social challenges that we are seeing here in Israel, but frankly also globally. Whether that be investing directly in the Israeli innovative companies that are publically listed, or it might be finding the practical solution that we can then take and translate to other markets.

There has been a lot of pressure on companies to disclose a constantly growing list of issues, so there is some resistance from companies on disclosure. But innovative companies are coming at it fresher, they have a great opportunity to define their story and tell it in a more imaginative, forward-looking way that resonates with investors. You should tell your ESG story in main core investor presentations.

Demand for new investment products is coming from our client base. Maybe in some cases, institutional investor, i.e. pension funds, but I think it’s coming from our weakest point – the retail sector. The new generation in big family offices, wanting to get more than just returns on their money. They are long-term investors, who are increasingly interested in social impact. And they are not satisfied with superficial reporting metrics, they want to know that something actually has changed. Engagement absolutely is one of the keys; it is a soft power mechanism that can bring about change within public companies.

 

Heather Lang | Sustainalytics – main points

Heather Lang, Maala Conference 2018. Photo by: Netanel Tobias

Sustainalytics is a global leading ESG service provider for institutional investors. We work with many large global investors, and our primary business is very much oriented towards those investor clients. We do research of thousands of publically traded companies globally, and we assess their environmental, social and governance performance; and our investor clients use that to develop all sorts of products and strategies, informed by non-financial factors which can have material implications for their investments.

Today I am leading up a team called sustainable finance solutions. We are working more directly with corporates and with financial institutions on that opportunity side of it, building on the notion that there are risks. We are focused on how they can address some of those challenges, and how they can allocate capital and resources towards a low carbon economy. It is the onus of the company to be a part of the solution, not just making themselves ‘less bad’.

Some of the new financial tools are green, social or sustainable bonds as well as loans. The idea is just like a regular bond, except for the explicit use of proceeds that is focused on impact. Often the SDGs are used as a framework for defining some of the different uses of proceed categories that we are facing. We have provided second party opinions to over 200 bond frameworks over the last few years; it is a market that’s grown really quickly. In addition to Europe and North America, we’ve been increasingly going into Asia-Pacific, Korea, Japan, even China, to support credible bond issuances.

The Turkish bank TSKB came to us in 2016, still fairly early in this industry, to build on their broader sustainability strategy, and position themselves as a leader, both regionally and globally. They wanted to issue a sustainability bond that would focus on climate change mitigation, adaptation; and social issues like education and health. They issued this $500 million bond; it was heavily over-subscribed. They won awards for Green Bond Deal of the Year by Global Capital and Thomson Reuters and some very prestigious awards. They diversified their investor base. They did a second one a year later, based on the success of the first. It positioned them as a sustainability leader. Surprising for Turkey, not where you’d expect it to come from.

I met with many companies in Israel over the last few days, and it’s interesting to see how much has developed just over the last two years. I think there is a real opportunity here, in the sustainable finance space, in particular because there is so much sustainability innovation happening in this country. Companies can really open themselves up to global investment from the responsible investment community, perhaps without some of the same political challenges that they faced in typical ESG. I think the opportunity is there to stand out with innovation and technology, and I know that this is already happening.