5 Jun 2020
In the absence of an LGPS PLSA event this Spring and in conjunction with Pictet and Pensions for Purpose, we held an interactive webinar on the future of sustainable investing.
Deirdre Cooper, portfolio manager at Ninety One and Marc-Olivier Buffle, portfolio manager at Pictet Asset Management, recently shared the platform at a webinar to discuss their approaches to impact investing. Here, we share some of the Q&A session with participants. [Questions and answers have been edited for concision and clarity].
Marc-Olivier Buffle: A ‘1.0’ sustainable investor might be using ESG data, which is basically Scope 1 emissions [direct emissions] and maybe Scope 2 [indirect emissions from purchased energy]. But it won’t include Scope 3 [all other upstream and downstream indirect emissions] and definitely not Scope 4 [carbon avoided]. That investor would be missing a big part of the equation, but the investment approach is going in the right direction.
Deidre Cooper: I also think for impact investing you must have transparent reporting. The challenge is that data disclosure is still at quite an early stage. Carbon data is far and away the most advanced of all the ESG data and is improving rapidly. But it is extremely difficult to get reliable data on things like biodiversity and land use. We have been very cautious on where we report impact, and really focused on what I call ‘radical transparency’ reporting. The quality of the data is getting better, but we need to work together towards really detailed impact reporting, in line with the kind of attribution we give on the financial side.
Deidre Cooper: To a large extent sustainability issues are correlated. Ocean acidification, which harms biodiversity, is a result of carbon emissions. But the social and governance issues are equally important. Through this coronavirus crisis, I think we have all begun to understand the importance of making sure that, as well as decarbonising, we support employment and economic growth. It was interesting to see a paper last week from IRENA, the international renewable energy research body, talking about the potential to create 100 million jobs through decarbonisation. In our strategy, we define the investment universe purely in terms of environmental factors – we are looking for companies that avoid carbon, first and foremost, and have identified an opportunity set of about 700 businesses. But once you get into the investment and stock selection process, at every step we integrate the ‘S’ and the ‘G’. In our fundamental analysis, we do our own ESG research in a very systematic way.
Marc-Olivier Buffle: We do not make top-down allocations to any particular dimension of sustainability. Rather, we ensure that companies in our investment universe are within a safe operating space – i.e., the sustainable boundaries we should be doing business (and living) within to avoid damaging the long-term equilibrium of the planet. Companies need to be sustainable from their supply chains all the way to their products. To do that, we do a lifecycle assessment on nine dimensions. We also ensure that they have at least 20% of their activities related to an environmental solution. That leads to a universe of roughly 400 companies that have both a small environmental footprint and solutions to environmental challenges.
Marc-Olivier Buffle: Our lifecycle assessment of companies is [primarily] based on a model. We know that US$1 million of a specific activity will require a certain amount of input and will generate a certain amount of output. Within each sector, the differences between the best-in-class and worst-in-class in these inputs and outputs is not that huge. Therefore, we think a model is a much better approach [than relying on data reported by companies].
There are big gaps [in reported data]. We invest globally, and a small-cap emerging market company will have close to zero environmental or social data, while [a global mining business like] Rio Tinto will have an army of CSR officers to provide sustainability data. The supply chain elements are particularly questionable because they depend on the scale and quality of resources that a company allocates to checking what goes on in their supply chain. We also find that the ESG data from research providers is of questionable quality.
Deirdre Cooper:I would agree, but I would add that data quality is improving quickly, particularly on carbon – partly as a result of investors demanding companies report more sustainability data. When reported data isn’t available, we also use models. We have an external data provider that we work with on the model because we think it is important to not mark your own homework on sustainability. Also, some companies’ reporting only covers a percentage of their operations; typically, if the cover is less than 90%, we tend to go with the model data. But while modelling gives you a very good idea of the environmental footprint of a company, it doesn’t allow you to monitor [a company’s] progress, because effectively what you are getting is the sector or peer-group average.
Deirdre Cooper: This touches on a key point. To really understand an environmental footprint, you need to consider direct and indirect emissions – that means also looking at the supply chain and end-of-use. In the electric vehicle space, we monitor progress not just in terms of how many cars a manufacturer is producing or how efficient their own operations are, which is the direct carbon footprint; we also monitor whether batteries are becoming better and hence making a bigger impact, and whether the supply chain is becoming more sustainable. [From this perspective], we are seeing huge progress. Every year we are getting better products, and that should help the energy transition.
Marc-Olivier Buffle: The fact is that this is a transition and, in the initial phases, there will always be things that are not perfect. We know that there is a lot of room for improvement in mining, electric car batteries and the entire value chain around them. But we need to remind ourselves that petroleum cars have been around for 120 years. So let’s give the electric guys a couple of years before we start deciding if this is the right approach, and for this technology to be further developed. Nevertheless, we have to be vigilant, and we must engage with companies to ensure that the value chain is being handled appropriately – including operations, the products themselves and the waste at the end.
Regarding Deirdre’s comments on Scope 3 and 4 (i.e., carbon avoided) emissions – this is absolutely key. If you don’t make a lifecycle assessment, you will be making the wrong decisions. [For example], 80% of a car’s emissions will be during usage.
Deirdre Cooper: I think, from a decarbonisation perspective, it doesn’t make sense to advocate shutting down investing in nuclear. It would have a huge negative impact on the climate. New-build nuclear is a different because it is just not cost-competitive. But nuclear life extensions, to the extent that they can be done safely, are really important to ensuring that the transition happens.
Marc-Olivier Buffle: We have a more negative stance on nuclear. While we don’t exclude it entirely, we typically don’t take companies that have more than 20% of their revenues from nuclear, for environmental reasons and economic reasons. [The Fukushima disaster] is a perfect example of an externality that has not been internalised in the price. [If you internalise that cost], be it new or old, nuclear is basically economically unviable. And then there is the waste, which was dumped in the ocean until the 1980s because we didn’t know what to do with it. This is a nightmare for the coming generation. So let’s put that money to work with safe and environmentally-friendly technologies, not with nuclear.