How to approach ESG holistically

In the second part of this Insurance Asset Risk/ Royal London Asset Management roundtable, insurers debate the 'E', 'S' and 'G' of ESG, whether each pillar has its own weight or if an holistic approach is necessary even if trade-offs exist.

Vincent Huck: The 'E' of ESG gets a lot of headlines and is in the spotlight. Does this affect the way you think about ESG? Do you put more effort into the 'E' because of that, or for other reasons? And how do you think about the potential trade-offs between 'E' and 'S', for example, when making investments? Do you see them as different channels or all integrated under ESG?

Thor Abrahamsen: It goes back to the question, 'what is ESG?' There's always an assumption 'E' and 'S' and 'G' go hand-in- hand, in some cases it is true and in other cases it is not. There are companies which might not score highly on the 'E', but score high on 'S' and 'G', but their output is still required for the transition to a better world.

If you just focus on the 'E' then you do the world a disservice in the long run. It's easier to just focus on the 'E' because then you kind of 'greenwash yourself ' and say you are active on something people talk and care about. The 'S' and 'G' become less important, maybe because they are more difficult to measure. And then, if you're going to look for a perfect score on all three pillars of ESG, then your universe is fairly limited. That is why a lot of people do this in a passive way, which means that you take an index, which doesn't come anything close to being a good vehicle, it just becomes whatever they can put enough ESG points in to fill up their universe and collect fees.

Lauri Seraste: Our asset managers have quite a holistic overview on this, using all the measures on ESG to know where to exclude and where to engage and on which topics to engage or ask for more information. Though the 'E' is really important, our policy covers a wider range of topics. For example, management remuneration, working conditions and staff satisfaction, so we see ESG as a more holistic approach.

Ashley Hamilton Claxton: I'm a social scientist by background, so I'm completely biased – 'social' is essential. If we're going to meet our climate goals, it's not an environmental problem; it's a socio-political problem. We cannot fix the environment in the vacuum of human behaviour and regulation and politics. The 'S' is essential, really, to unlocking it for me.

Kristofer Dreiman: From a stakeholder perspective this is an interesting question. In 2019 we received input from our customers and owners. One of the recommendations was that we put in place an exclusion criteria for gambling companies, which we did at the beginning of 2020. Then COVID happened, and in the Nordics gambling companies outperformed, so it has cost us financially, at least during this period. Still, this action has been one the most appreciated with regards to ESG by our customers.

Erik Ranberg: For us, there is no question of priority between the three letters of ESG. We have to fulfil on all three. Being a company that has existed for over 200 years, you can actually look back and you can see that the success of the company has been built on a culture of taking care of the 'S' and the 'G'. It is very important to how your customers see you as a company. And it might be implemented slightly differently in a mutual compared to a listed company, but it ultimately has the same impetus.

My final point is, you need to be aligned with society, and the content of the 'S', the 'G' and the 'E' will evolve over time and you have to be attuned to that evolution.

"Typically, responsible investment teams are still relatively small, so just meeting compliance requirements can take up so much time. This can actually distract from probably the more important aspects of making sure we're investing in the right companies" Andrew Epsom

Andrew Epsom: With regard to the potential conflict in available management time between focusing on shorter-term economic returns – particularly given recent volatility – and building out a more robust ESG policy, there's probably three dimensions. There's the pure investment return focus; there's actually doing the 'right thing' by facilitating the required transition to a more sustainable economy; and then there's the 'tick-box' element of meeting the emerging regulations at the moment.

To what extent do people view the regulations as actually being helpful to try and push the ESG agenda forwards, or do we think it's actually a distraction from doing the right thing? Typically, responsible investment teams are still relatively small, so just meeting compliance requirements can take up so much time. This can actually distract from probably the more important aspects of making sure we're investing in the right companies, and engaging with them appropriately to positively influence behaviours and outcomes.

Erik Ranberg: I'm on the fence. When I have to work on the reporting I feel like it's a waste of my time. But at the time, I think that it's actually okay. Because most of it, is something that we've already done and it's in the company and it's in the culture, so why not be transparent?

Lauri Seraste: I fully understand the political setting, you know looking at the EU green deal agenda and what it is trying to achieve.
But then when it comes to the specifics on how you do it and how fast you're able to do it – that becomes challenging. And there is a systematic risk of directing the market to some specific sectors or assets. So even if the idea is good, the implementation is the challenge.

Maybe it would be better to allow private companies to find their own path, and allow them to explain that path so that they don't come across as going against the overall objective.

Kristofer Dreiman: Upcoming regulation and new reporting requirements can sometimes distract us from developing our ESG integration in the investment process, but it might just be related to the fact that we are a team of three, compared to you Ashley and your team of 17.

Ashley Hamilton Claxton: We do spend a lot of time reporting at the moment, which is sometimes a bit of a frustration, but I think it's a necessary activity

Kristofer Dreiman: But at the same time, we should not just be spending time on ESG data gathering, structuring and reporting.

Thor Abrahamsen: That's always the risk. I agree with Erik that transparency and culture are important. But the thing that seems to be lacking a little bit is an overarching long-term strategy that is kind of accepted on a political level. And maybe the EU is a bit of an exception in this, but still you can't get any regulations coming out shorter than 1,000 pages. You just end up being swallowed in reporting, rather than actually doing things.

Erik Ranberg: I share all these complaints, but at the same time, I must say that the reporting actually helps me to make us work more systematically and structurally. As you mentioned, Ashley, these are judgements. So, we have to discipline ourselves to express the judgements we are making. Transparency is very often pretty good.

Kristofer Dreiman: One challenge is that when we ask our customers what they think of our overall approach to sustainability, they like it and we often end up at the top of the rankings, but then when we ask more detailed questions, they have really no clue on what we do. And maybe that goes back to how we actually report on what we do, which is partially driven by regulation. There seem to be a gap between what regulators want us to report on and what the typical beneficiary can grasp. Through conversations with peers, there seems to be a problem in the industry as a whole. The EU regulation will hopefully help over time, but not for the time being.

"I'm on the fence. When I have to work on the reporting I feel like it's a waste of my time. But at the time, I think that it's actually okay" Erik Ranberg

Erik Ranberg: You are touching upon something that's quite interesting and links to the development of ESG. At first it was about 'do no harm', and that was ESG until not long ago. Today we look at ESG differently, as a way to be proactive and impulse change. But while some customers are on board with that and want to contribute, some are happy with the old format, whereby their pension, insurance or investments are secured.

This is where we have to be careful not to be in conflict with society.

Kristofer Dreiman: And given the developments we have seen in Eastern Europe during this Winter and Spring, it's really interesting to hear discussions on investments in defence and weapons. There has been a pretty general debate in Sweden on whether this is ok, or not. And the expectation from society, at least how we observed it, is that conventional weapons and defence equipment should be allowed in investment portfolios in order to be able to protect our societies, but not necessarily those that manufacture cluster munitions and other types of controversial weapons. Some peers have actually changed their criteria based on this.

Read the first part of the round table here and the third part here.