The rise of ESG criteria

Interview with Nicolas Jacob, Head of ESG research at ODDO BHF Asset Management SAS

What are the risks and opportunities in being the first to integrate ESG criteria? 

ESG integration is now well developed in the market and is entering in its maturity phase. The UN Principles for Responsible Investment (PRI) bring together around 1 450 signatories worldwide. The fact is that assets owners and investors are asking for such an ESG integration.

Speaking in general, in your opinion, could a widespread application of ESG criteria lead to an improvement of how finance in general is viewed by the public? 

What is clear today is a generational phenomenon. The younger generation – the Millennials – is much more sensitive to ESG criteria. They are convinced that the economic and financial system must adapt to structural changes like global warming or a better sharing of value creation between different stakeholders. In longer term, ESG should give finance a better perception and to be seen again as an efficient tool for economic development and not only for short term speculation.

Why is it so different to integrate these criteria in a fixed income fund? 

We use the same methodology in term of ESG analysis of issuers and portfolio managers have access to the same tool and data either for equities and credit. Nevertheless, at the investment process level, when we directly impact companies’ valuation in an equity fund, we work on each issuer weight in a credit portfolio. In both cases, we consider that the ESG rating represents a risk premium.

Was it difficult to translate that approach, already used in equity funds?

With a large overlap in term of issuers compared to equity markets, ESG integration for credit was a logical extension. Apart from how it impacts the portfolio’s construction, the main add on was the implementation of the dialogue and engagement policy. Dialogue and Engagement is traditionally an important component of an ESG integration process for equities given the fact that you have a voting right. This is a new dimension for credit but don’t forget that even if you have no voting right, you always have the ability to reinvest or not at maturity. In practice, our engagement process is common for equities and credit. We put in place a quarterly ESG committee who in charge of discussing which companies we are going to engage for the next 18 to 24 months. We put the focus more on low ESG-rated companies and we try to push 2 or 3 specific issues like environmental targets, remuneration policy or supply chain management. If we get no positive result, we may decide to divest or exclude the issuer from the targeted investment universe.

Do you think that this strategy is going to become a key issue in guiding your company performance?

ESG integration is gaining traction everywhere and in different asset classes. Regulation is evolving in national but also European level in the sense of more responsible investment practices. ESG integration is becoming part of your license to operate in the asset management field.

Do you think that in particular moments the performances of ESG funds, compared to non-ESG funds, may be strongly different and why?

The question around performance is key and is a source of debates for years. If we consider a reasonable period of time for investments in equity or bonds, i.e. at least 3 to 5 years, a lot of academic works have showed that there is no difference between ESG and non-ESG funds in term of performance. But the same academic works also show that ESG funds are less volatile than non-ESG funds, and in particular in a bear market context. So, all in all, we consider ESG complements the financial analysis and that performances is due to the portfolio managers’ ability to do the right stock-picking.

Nicolas Jacob, Head of ESG research at ODDO BHF Asset Management SAS