How thematics can take in the bigger ESG picture

By Bethan Dixon, portfolio manager, Quilter Investors

Over the span of its nascent existence, ESG investing has been dominated by the ‘E’ and the issue of climate change.

There are numerous reasons for this, and it should be no surprise to investors that climate-based investments and transitioning to net zero is a key driver of the boom in ESG’s popularity from a niche subset of investment to something verging on the mainstream.

The media attention given to climate change has undoubtedly helped drive this. It is the biggest environmental crisis we are facing, and it effects every single one of us. The prominence of the likes of David Attenborough and Greta Thunberg has shifted everyone’s attention to seek solutions to the climate emergency.

The investment world is no different and much of the march to ESG has been due to this increased awareness of environmental issues. But addressing such issues has also been a more easily understood challenge for asset managers.

It is important to recognise that sourcing and navigating ESG data sets is generically complex, however, it is more straightforward to measure against a decarbonisation target. Having metrics to be measured against things such as net zero by a target date makes it easier for a fund to achieve its objectives and thus appeal to investors.

However, this risks ESG becoming one dimensional and failing to fully account for societal challenges, including those posed from climate change itself. Instead, ESG portfolios need to take a more holistic view of these challenges when considering how portfolios are making a real difference.

Governments are pushing the climate agenda with the likes of mandated disclosures and this is rightly a major priority. But it must be recognised we face other challenges where information is harder to come by and so identifying the issues and how we can fix them is less straightforward.

The Covid-19 pandemic certainly shone a light on some of these issues and brought ’S’ risks more to the forefront. This has been reinforced by examples of poor employment practices, such as Boohoo and P&O Ferries more recently, and the disparity in services across classes, countries and continents.

SDGs

Those funds seeking to take a more holistic view of environmental and social challenges may look to the United Nations’ Sustainable Development Goals (SDGs) for objectives, but measuring against these is a much harder task.

First, there are 17 of them with a total of 169 target and 232 indicators and not all of these are investable. Measuring the impact of an investment against these can be tough and there are many different ways to assess these. 

But this does not mean we should simply ignore them. Instead, the goals can be a useful framework to help achieve a sustainable portfolio that targets a broad set of outcomes, identifying a set of specific themes that help target a specific set of SDGs.   

An example of a fund focused on driving social outcomes through its alignment with SDG goal 3, ‘Good Health & Wellbeing’, is the Candriam Equities Oncology Impact fund. The fund provides exposure to healthcare with a specific focus on cancer. Cancer is the second leading cause of death globally and the fund is seeking to invest in companies that are generating positive health outcomes by focusing on the research, diagnostics and treatment of cancer.

However, there are also funds that when viewed through the lens of the SDGs generate both positive social and environmental outcomes. The Allianz Food Security fund provides exposure to sustainable agriculture, the food supply chain and nutrition. The production of food can be incredibly carbon intensive through the use of fertilisers and has a negative impact from a biodiversity perspective from pesticides.

However, fertilisers and pesticides have been critical components in driving up agricultural yield supporting growth in food production, which is a fundamental social challenge. Therefore, there is a fine balancing act here. Allianz Food Security seeks to invest in solutions that tackle the environmental challenge of food production and therefore supporting SDG goals 13, ‘Climate Action’, and 15, ‘Life on Land’, while being also very conscious on the potential negative impact on yield. Elsewhere, the fund is seeking to drive social outcomes by investing in companies that provide access to affordable nutritious food and in doing so supporting SDG goals 3, ‘Good Health & Wellbeing’, and 2, ‘Zero Hunger.’

Furthermore, because so many of these funds are deeply rooted in their niche, there is very focused expertise and they can spend the time engaging with companies and seeking out specific information and data sets which may not be readily available by third-party ESG data providers. This focus allows the fund manager to make a granular assessment with regards to the alignment to the SDGs and the positive outcomes being achieved.