By Marie Lassegnore, CFA, Credit Portfolio Manager & ESG Director for Fixed Income and Cross Asset, La Française AM
World Environment Day was born 50 years ago and is based on the understanding that collectively we can and should protect the environment we deeply depend on. To do so action must be taken. Collectively, individual actions can give way to deep-rooted structural transformation of how our society produces and consumes, and hence how we use natural resources: air, land and water.
Major corporations are deeply encouraged to step up but individual action and shifts in consumer behavior are the keys to a successful, orderly and just transition.
As asset managers we have a dual role to play, offer financial products to investors that are directing financial flows towards companies which are active in reducing their carbon emissions and adverse effects on biodiversity (amongst others) but also to use the indirect collective power of our asset owners to engage with companies, governments, and regulators on topics such as environmental preservation.
The development of the European Sustainable Finance Disclosure Regulation (SFDR) aims to clarify the sustainable objective behind investment funds, allowing each investor to differentiate between the strategies adopted and specifically target the sustainable objectives he/she wants to achieve through his/her investment portfolio. We are still a long way from a fully comparable level of information among asset managers, but the strengthening of the regulatory supervision should normalize the landscape of sustainable investments products in the coming months/ years. Furthermore, as of 2024, large companies will be required by the Corporate Sustainability Reporting Directive (CSRD) to report on 2023 Environmental and Social impact activities. This initiative will provide greater transparency and help in the evaluation of the non-financial performance of companies.
Our industry could run the race against global warming and rising social inequalities faster, but it can’t run it alone and needs the support of its investors without whom it loses any ability to promote change. We would suggest that investors, of any profile, consider the positive and negative externalities of any investment decision. For this, asset managers must give investors the tools to quantify those externalities so that any investment decision goes beyond a risk/return profile but takes into consideration the known positive/negative impacts of investments on social and environmental factors.
We have chosen to address this objective by developing a climate transition investment approach, which includes specific selection processes, depending on the relevant asset class, i.e., government bonds, corporate credit, equities, cross asset. Having developed that approach well ahead of new regulations, we had already set a high standard by ‘quantifying’ the emissions reduction impact we target (between 30% and 50% reduction of carbon intensity and/or footprint vs comparable market benchmarks).
We have a fiduciary duty to our clients to integrate all relevant risk factors into our investment process. Mounting environmental and social risks are now integrated beyond the simple awareness of their longer time horizons (than short-term financial potential returns). The power of attorney that delegates our clients’ voting rights to us, allows us to weight our recommendations and votes to a meaningful extent when you combine our assets under management. This influential capacity goes further than our equity holdings and extends to our bond holdings of private companies where we can have a large share of their financial markets’ source of funding.
Where we have the most substantial power is through industry initiatives and collaboration. Asset managers can become active participants in collaborative engagement initiatives and tailor actions to specific themes. For illustration purposes, two industry initiatives in which La Française has taken part.
We participated in the Carbon Disclosure Project (CDP) Non-Disclosure Campaign for the third consecutive year in 2021, calling on high-impact companies to use the CDP questionnaires to report information on climate change. CDP provides the financial sector with the most comprehensive collection of self-reported corporate environmental data in the world, in a uniform and comparable manner, and one that is fully aligned with the Task Force on Climate-Related Financial Disclosures (TCFD). We increasingly view CDP reporting as a minimum requirement for any company demonstrating its commitment to measuring and managing its climate-related impact.
According to CDP, the 2021 NDC (Non-Disclosure Campaign) saw a 56% rise in the number of financial institutions signing up for the campaign compared to 2020, leading to a total of 168 Financial Institutions representing over US$17 trillion AUM. This year the campaign targeted 1317 distinct companies representing over US$29 trillion in market capitalization and over 4.9 billion tCO2e in combined scope 1 & 2 emissions. The disclosure rate for companies targeted by participants rose from 21% in last year’s campaign to 25% this year.
We are also part of the Climate Action 100+ initiative, launched in December 2017 and which is the largest investor engagement initiative on climate change (USD $68tn of AUMs through 700 signatories) that coordinates engagement with 167 of the world’s biggest listed corporate emitters. Thanks to net-zero company benchmarks, it provides a way of measuring companies’ progress on carbon emissions reduction, governance, and disclosure.
Over the last decade, we have supported various multilateral groups and organizations in developing and improving methodologies, implementation of new rules, and creating more awareness on activities related to sustainable investing. For instance, we have been part of the Science based targets initiative (SBTi) working group to develop guidance for institutional investors and test the methodology. We have also been part of the PRI EU taxonomy Practitioners Groups – Case Study to test the implementation of the EU taxonomy for sustainable activities.
This collaborative mindset is relatively recent in such an industry historically driven by financial returns maximization in a highly competitive market. This mentality shift proves that more and more asset managers want to take part in shaping sustainable finance over the decade to come. However, COP26 highlighted the glaring financing gap to meet the objectives behind the sustainable development goals which were estimated at around $100bn a year by 2020 at the Paris agreement. We need more capital flows directed towards climate change mitigation and adaptation. This can, once again, be encouraged by a faster shift in banking and asset management consumer preferences by clearly highlighting this aspect as being fundamental in final decision making.
The key take-away of World Environment Day is that we can’t keep waiting for everyone else to deal with our environmental deterioration, but we can individually own the responsibility of our actions and our choices.
Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.