European Business Magazine speaks to Christoph Klein (pictured), Managing Partner and Founder of ESG Portfolio Management, a Germany-based Advisor of investment funds and segregated account investment funds. ESG Portfolio Management fully embed the UN Sustainable Development Goals (SDGs) into their investment process, with every investment contributing to at least one of the seventeen SDGs.
1) ESG is taking centre stage, particularly in Europe. Why has the topic of ESG recently gained importance with European investors?
ESG is very broad with three pillars – environmental, social and governance, with approximately 200 KPIs, and investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Recently, climate change has been a dominating theme, because it is the root of so many other problems. For example, in the long-term, rising sea levels, water scarcity and heat, while environmental, will also have a societal aspect. Investors realise these issues are crucial. These problems will impact the poor most. It is unfair as they are least responsible. They are less resilient so it is harder from them to adapt. The Global Tax Agreement includes plans for a global minimum corporate tax rate of 15% to be imposed by 2023, reinforces that every company needs to contribute, and is another reason why ESG gained importance.
2) Did the COVID-19 pandemic accelerate developments in the ESG space and help change attitudes towards making social impacts?
The COVID crisis has brought about medical progress but fair distribution is so important. It has reinforced that fairness and empathy is the core of ESG. The institution COVAX is dependent on donations and couldn’t provide universally – when we don’t vaccinate everyone, we won’t overcome the crisis. The COVID pandemic has pushed a global perspective, revealing a combination of self-interest with empathy. Some governments did support sectors which were heavily impacted, but not in all locations, and it hasn’t reached everyone. For example, in developed countries some areas like culture and the self-employed were not supported. While the pandemic may have promoted some response, unfortunately the help hasn’t reached everyone. Improvements like the global tax agreement, underpinning it is not acceptable that super profitable global companies pay close to zero tax, may have come out because of the COVID crisis. Government spend was highlighted, we needed to fund hospitals and everyone needs to contribute and be on board.
3) Sustainable investing has come a long way. This growing influence is accompanied by an increasing desire among investors to embrace ESG-defined opportunities as well as risks. How has the discourse around ESG changed in the last 5 – 10 years?
At ESG Portfolio Management, we see ESG as risk management. Sustainable investing is about sustainable development goals and looking at the impact. Certainly, we all want to produce positive impact, but the first step is to avoid or reduce negative impact. Measurement is crucial in this regard. We are just updating our input with DVFA about SDG impact measurement. Over the last decade, more tools have become available and the data is getting better. The main element remains the same, and that is that we need to prove it. There are so many participants claiming positive impact, but there is little substance behind it. Trust has become more vital, and it must increase in the next years. The SFDR, the disclosure requirements for sustainable funds, demands this. Currently, there may be motivations for portfolio managers to tilt it more to environmental because of the EU taxonomy, but the SDGs are environmental and social. We are looking forward to see more social elements in the future taxonomy. This will make the overall impact even more complete.
4) What trends are emerging in the impact market and what are the biggest risks for the ESG approach?
The big trend at the moment is to measure in a transparent way, and this is set to continue. It is what negative impact is there. The EU regulation demands reporting on principle adverse impact. Then we need to get the positive impact by looking at the company and the products and services they are offering. Link it to a norm-based screening, a process through which investors can investigate a company’s policies regarding key societal or environmental issues. addition to risk management and a positive environmental and societal impact, regulation is a factor that is also becoming increasingly important among the drivers behind more systematic ESG incorporation. SDG impact is getting more important. How do you help others? From a financial perspective, companies with fantastic impact product and services, should outperform others in the long run. The risk for the ESG approach is that it is alright from a risk perspective, but it is not sufficient. If you want a sustainable fund, it must do SDG in addition to ESG.
5) In January 2020, ESG Portfolio Management received the German Excellence Award. In 2021, the organization won the ESG Investing Awards in the Multi Asset and Fixed Income categories and was the winner of the German Award for Sustainability Projects in the Financial Investment category. ESG Portfolio Management was included in the UN PRI Leaders’ Group. What an accolade. What makes ESG Portfolio Management stand out against other traditional asset management firms?
Sustainability has multiple dimensions. You have reasonable exclusions, you want ESG quality, you measure negative and positive SDG impact. We use dedicate specialist to measure that our funds are Paris aligned. It is not easy to optimise all these dimension at the same time. Furthermore, we engage with almost all the companies we invest in. We are fully transparent, and our reporting reflects this. This openness and approachability sets us apart. We present, we recently published in the Journal of Environmental Investing. I was invited by Moody’s Analytics to design and instruct ESG seminars. This level of completeness, including that our funds are Paris aligned, is rare – not many funds achieve this. We are open and we share our knowledge. Besides our team we have an amazing global advisory board. The combination makes us special.
6) How is the EU using regulations to push businesses to do more, to scale up action?
In addition to risk management and a positive environmental and societal impact, regulation is a factor that is also becoming increasingly important among the drivers behind more systematic ESG incorporation. We currently have more demand for disclosure. We need the data, otherwise we cant do our calculations. We need more disclosure, more data points from companies. Not only the big ones in developed countries. The EU is pushing and the standards are certainly evolving. It’s still early days, but the urgency is there. We are on the right track. Its not just politicians and regulators that are responsible for scaling up actions. Organisations like CDP, Principles for Responsible Investing or SASB, act as global standard setters. Well defined metrics make our job easier. Harmonisation and standardisation, if done well, is great. The EU Taxonomy is an important standardisation tool to assess sustainability and reduce ’greenwashing’. Awards and public acknowledgments will motivate other companies to act this way too.
7) Impact investing is increasingly situated at the forefront of institutions. What would your advice be to investors who are trying to find a sustainable way to invest their savings?
Firstly, they should determine what SDGs are important to them, and ask the following questions. What do you want to achieve in the long term? How can this impact be measured? What data is necessary and what tools are out there? How do these methodologies differ? After that I would look at funds or other investment products. It will be less likely that you will fall into the green washing marketing trap, if you have your own standards and criteria to check. Labelling helps investors decide, if the label is high quality and independent. International awards are a sign that the company is on the right track. High quality sustainable fund labels are certainly supportive. I am a member of the CFA ESG technical committee, and we have worked on global disclosure standards for sustainable investment products. They were published in November. This will help investors across the world, another standard to avoid greenwashing.
8) As the landscape changes, the investment industry is better prepared to adopt impact investing. What can we expect in the coming years?
I am optimistic there will be a lot of developments and innovation will continue. I would expect to have more themes like solar powered desalination plants, and see more asset classes. We have seen fixed income and equity, but how do you do it with property? There are still more open questions to answer, and there are fantastic opportunities. I’m inviting our clients to open a dialogue as it is a learning curve for us. We will see huge progress in this collaborative approach. I appreciate the big organisations, like Principle for Responsible Investing, SASB, GRI, who have spent many years selecting important KPIs, which is so helpful. Also, for example the Ellen MacArthur foundation is working against plastic waste. There are so many engaged and motivated people, the future is filled with opportunities.
