Who Are The Best Investment Managers for ESG?

Plastic Soup. Climate Change. Water Shortages, Food Shortages...For many these are important, but they are tomorrow's issues, not today's. Yet what these many fail to realise is that they are also today's biggest investment opportunities. Do these three things:

1. Look at the stats on global consumption/resource utilisation, population growth, sources of greenhouse gas emissions, waste and plastic recycling, water loss and demand...

2. Look at how government views on taxing externalities has changed over the past 20 years, and extrapolate forward.

3. Take a look at some of the companies at the cutting edge of food, energy and recycling solutions, then talk to some early investors and strategic allocators to the circular economy.

Within 30 minutes, what you thought were tomorrow's issues, may become today's portfolio priorities.

Long before ESG criteria and ratings became mainstream, many institutional investors maintained exclusions lists. And in some jurisdictions this was written into law. As an example, investments in companies associate with the manufacture of cluster weapons were forbidden in The Netherlands. But what will exclusion lists look like going forward?

In a world where national and regional security has been elevated up to the highest levels on the political agenda, the ESG properties of Aerospace and Defence companies has become a controversial debate. Ideology may be changing along with the new world order. But it is a debate that is surrounded by subjectivity. And finding common ground may be impossible, unacceptable, or even unethical.

In our real estate feed there were several search queries on US Low-Income Housing Tax Credits, 'Change-0f-Use' projects, and UK Social Housing. Research and case studies on the social impact of residential real estate is getting the most clicked. Affordable housing is clearly attracting investors.

Feeding the world has become more challenging. But the issue is not just a result of supply constraints for wheat, corn, barley and sunflower oil, as a result of the Ukraine-Russia situation. The problem lies deeper. And the solution is creating a substantial long term opportunity for investors.

How Can We Feed The World?

One would assume that farmers globally would simply rotate their crops, or grow more, to fill the gaps and enjoy the elevated prices. But there are two issues:

- Food needs fertile ground, which while abundant in Russia and Ukraine, is not the case in alternative farming countries.  The price of fertilisers and fertiliser related inputs (Potash, Nitrogen-Phosphorus based fertilisers, and ammonia) are soaring. Why? Belarus, Russia and Ukraine are the world's largest suppliers and the supply is not coming.

- Climate Change related weather patterns are not helping. Alternative large producers of Corn (such as Brazil) and Wheat (such as several U.S. states) are experiencing poor harvests as a result of low rainfall and warmer conditions.

One quick solution would be to reduce food waste, which may happen automatically given the high cost of food. But this is a partial solution at best.

Some countries have already restricted the exports. For example India (Wheat) and Indonesia (Palm Oil). But for a country to become food dependent, like North Korea, puts a country at risk when crops fail as a result of disease or extreme weather conditions. It's a long-term solution with caveats, that does not solve todays problems.

The more likely solution will come from fertiliser production and food protection companies. Given the expectation that food price inflation and supply constraints are likely to persist for several years ahead, the food security thematic has gained the attention of the institutional investor community.

2021 saw record new issuance across the ESG Fixed Income market. In contrast, 1Q22 saw a change in that trend. New issuance recorded it's first quarter-on-quarter drop, down approximately 80% versus 4Q21 and 15% versus the 1Q21. But that may be about to change, especially in Europe.

The EU is now faced with a dichotomy: On the one hand, there is a refocus on Energy Security following the Russia's use of Gas and Oil supply as a bargaining chip to reduce the EU's involvement in Ukraine. And at the same time,  to meet EU demand for energy, several countries are u-turning on the reduction or resistance to coal-powered plants or nuclear power. The Netherlands and Poland are but two examples.

The political narrative points to the immediate imperative. A bitter pill to swallow for many that can only be digested with the promise of a longer term, greener alternative.

Despite the recent dip in ESG Bond issuance, asset managers are expecting a new impetus for Green Financing in 2022. Which for investors creates new opportunities to accelerate their net-zero portfolio ambitions.

Green Bonds have been on the market since 2017. They generally fall into two categories:

Project Based - These bonds are often labelled Green, Social or Sustainability Bonds as the proceeds are dedicated to green and/or social projects.

Target-Based - These bonds are often labelled Sustainability-Linked Bonds and whilst there is no requirement on for the use of the proceeds, the coupon/return is directly linked to pre-determined KPI's.

Together with Traditional Bonds issued by ESG leaders, today Green Bonds are gathering interest from institutional investors & investment advisors. They are one of a range of instruments that can help shift portfolios to net-zero and reward climate change mitigation and social betterment.

But there are issues that need to be addressed in the evaluation of issuers and green bonds:

- Labels: Investors need to get behind the labels. Does the issuer have a green framework that aligns them with a net-zero pathway. And does the bond issue have materiality for the issuer, with respect to their core business?

- Corporate Disclosures: Many corporates only disclose Scope 1 and Scope 2 carbon emissions. Whereas the all encompassing Scope 3 data (direct and indirect carbon emissions as a result of business operations, heating and electricity use), may not be readily available. Equally important, is the future direction of emissions. Is the issuer looking to improve on their current situation?

- Sovereigns: Whilst there are tools available to assess a countries commitment to climate change, but is it possible to engage and impact a sovereign issuer? The reality is that this may be harder, and yield slower results compared to a corporate.

In general, sustainability and social data for corporates and sovereigns in both developed and emerging markets is neither uniform nor complete. So to identify the Green Bond investment managers that have an informational edge, deeper qualitative research is required.

Looking for the best Green Bond investment managers? Start your search inside RFPnetworks.

What targets and milestones should investors set themselves on their journey towards net zero across all underlying asset classes in their portfolio?

And what are the best tools to get them there?

A huge amount of research on Net Zero portfolios has recently be published inside RFPnetworks. Take a look.