ESG should not be tackled as a bundle

Investment committees and boards tend to take environmental, social, and governance (ESG) issues as a bundle when E, S, and G are not created equally, according to Northern Trust Asset Management.

The firm’s senior vice president, head of asset management for Australia and New Zealand, Bert Rebelo said it was hard to tackle ‘S’ issues through listed equities but with ‘E’ there was plenty of evidence that it produced negative externalities but that the timeframe could be longer.

“When it comes to climate change, it’s often multi-generational so you’re trying to address a multi-generational issue and discount it back to mark-to-market today and trying to extract alpha. Therefore, responsible investing would be suitable as an umbrella term, under which you could put E, S, and G,” Rebelo said.

“Ethical investing is something different as it’s more linked to belief and values. For me, ESG has to do with long-termism, so sustainable investing might be more appropriate as the decisions you make today shouldn’t be detrimental to the value you want to create tomorrow.”

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He said there was mounting evidence that companies that were well governed tended to do better over the medium-to-long-term and governance was more closely linked to fundamental analysis.

He noted that while ESG products had become more abundant asset owners’ principal concerns tended to relate to performance and transparency issues.

Rebelo said Northern Trust integrated their factor based approach with ESG where they combined their quality overlay with an ESG score to provide a sustainable investing approach.

“Sustainability is key, as we seek to invest in companies that are both financially sustainable as well as from an environmental, social, and governance perspective,” he said.

“As we take both of these dimensions into the portfolio construction process, those with the lowest ESG ratings are excluded from the investable universe.

“By combining ESG integration with quality, alongside meaningful restrictions and carbon footprint reduction, we believe the growth trends witnessed here will continue.”

Northern Trust Asset Management recently launched its Northern Trust US Quality ESG mutual fund to target both high Northern Trust Quality Score and the MSCI ESG score along with achieving substantial carbon reduction and avoidance of some ethically questionable stocks.

Along with this, the firm launched two ESG equity index UCITS funds – The Northern Trust World ESG Leaders Equity Index Fund and the Northern Trust Emerging Markets ESG Leaders Equity Index Fund.

The funds only include companies that are in the top 50 per cent of market cap in their respective sectors and regions by the level of ESG scores assigned by MSCI ESG Research.