ESG Integration in Investment
Programmes & Portfolios 

Global Investor held their inaugural ESG Roundtable in June. It was moderated by Roy Zimmerhansl who led an engaging discussion with the diverse panel on ESG integration in portfolios to regulation to practical implications and much more. 

A portion of the 2023 ESG Roundtable is available in the video above. See below for a transcript of the highlights. 

Roy Zimmerhansl (RZ): Thanks everyone for participating in the 2023 ESG roundtable, which is hosted by Global Investor, so appreciate your time and contribution here. I thought it might be just useful for everyone to really start from their opening position. How do you view ESG generally, and how does it fit into securities finance? So I’m wondering, Jane, maybe we can start with you.

Jane Wadia (JW): Sure. I mean, I guess my perspective is that every player or actor within the financing value chain has a role to play. So everybody from the asset owners to the asset managers to securities finance. They can each contribute to this journey that we’re on to create a more sustainable economy.

Donia Rouigueb (DR): I fully agree with that. I think that we get a call for action today and securities finance is definitely one of the industries that has to answer that with concrete solutions for the final investors and this is a very, very important topic for everyone.

Harpreet Bains (HB): Securities lending is not a sustainable product in its own right, but it plays an important role in supporting the capital market ecosystem, which is key to the success of the broader sustainable agenda.

However direct ESG objectives are an increasing feature of our clients’ strategies, and in order to maintain consistency and alignment across their investment activities and prevent an undermining of their overall ESG strategy, they are assessing for where aspects of the securities financing flow are crossing over with their ESG objectives. The journey doesn’t look the same across all lenders and also varies in terms of progress made so far. It really is an individual lens.

RZ: Maybe you can talk to us about sort of the considerations that go into constructing a portfolio and how you approach that.

JW: Sure, I mean, that multiple different ways that we incorporate ESG or sustainability in some portfolios that are managed, I think what has become relatively mainstream today, at least here in Europe, is where investment managers such as ourselves, are incorporating ESG information to help meet their investment decisions historically.

We have looked at valuations and equities, and credit worthiness in bonds, and today, we’re adding more information about the E, S or G of a particular company to help us inform whether we want to hold or not a certain security increasingly however, what we’re seeing is the shift from that to now also looking at portfolios who have as part of their investments objective, a sustainability goal, whether that is helping to decarbonise or having portfolios that have an explicit decarbonisation trajectory, or looking to create some positive impact whether it’s an environmental or social goal. That is really where we have seen a radical shift over the last couple of years and I expect that that journey will continue.

Regardless of each country’s or region’s story points, there is only one probable direction for everybody but I do think that Europe has led the way historically and continues to lead the way so that those sort of two approaches that I articulated are most prevalent in Europe, but we are seeing it increase whether it’s in Asia or even in the US.

RZ: Donia, across the universe of the customers you have and the investors that you see and talk to about securities lending: where are they in this kind of journey themselves?

DR: I think they are like everyone else - still figuring out exactly what to do, and how best to engage with ESG an define an actual policy. There is often a situation where everyone agrees that we should promote sustainability and a more sustainable economy, but we still need to actually define practical initiatives. Looking at the practical steps that companies take, we see that our clients, who range from pension funds to institutional fund managers, all have a different approach.

HB: Building on what has been echoed by Jane and Donia, the ESG landscape is constantly evolving, therefore as you would expect, market participants progress also varies. Factors that we see impact the levels of integration, include, geography, sector, size, and investor preferences.

RZ: Do you think that’s, that’s a factor of organisational size or sophistication or sort of focus on this specific ESG?

HB: Yes, in my view the size and sophistication of an organisation does impact the speed at which firms are able to successfully move on this because it requires for a reasonable level of investment in technology and infrastructure to be able to support the process effectively which not all firms have access to.

RZ: Jane, do you see the same thing on the investment side of things where investors come to it with different degrees of sophistication and focus. Maybe you can add a little bit on that, and also, when they’re focusing what is the first thing that they want to look at?

JW: I think everybody’s on the spectrum effectively in this area, and arguably on a journey as well. Perhaps the most simplistic way of integrating ESG is to exclude companies and you know, that can be a valuable tool, particularly excluding the right worst offenders, but by excluding you’re not actually solving the world’s problems.

You’re just sort of passing it on to someone else. And so, you know, the more sophisticated approaches are actually incorporating ESG research into portfolio analysis and therefore portfolio construction. Engagement is one key mechanism through which asset managers can and asset owners can take on that responsibility.

RZ: Are you talking about let’s say, for example, in the fossil fuel industry and you have two legacy companies that are oil drillers, but one has a more pronounced and directed agenda towards becoming more renewable focused, how does that play out?

JW: That’s absolutely correct and what we have done is created a framework, a climate framework by which we assess companies that are part of our investable universe and mapped them on a trajectory. So are they net zero today?

There are very few companies in the world that are just, or are they sort of on the red spectrum laggards, what we would call climate laggards where, based at least on our analysis and the information that we have available and our discussions with these companies, we currently at least have very little faith that they will transform themselves. Then you have everything in the middle, so again, it’s a spectrum.

In our case, a company, a fossil fuel company where we view does have credible targets and commitments to move towards renewables etc, is a company that we will also allow ourselves to invest in. At the same time, we will exclude the worst polluters, if that makes sense, and also, where we own sort of climate laggards today, we put in place what we call our three strikes and you’re out policy a couple of years ago.

This is where we will engage with these companies and if over a period of time we don’t see progress or results, then we will use those investments as a way to manifest the fact that we no longer want to support them.

RZ: That’s really interesting, because I think that lays out some of the challenges in terms of taking an approach here that’s sustainable, but by definition, that must make it harder for sort of agent lenders and the securities finance market to deal with.

DR: Let’s talk about voting first. It’s something agent lenders are now used to managing for their clients, recalling securities automatically. Obviously, it’s up to the client because some have thousands of ISINs that they’re investing in and it’s not just about recalling the securities, it depends on the client’s willingness to engage and vote at an assembly. So we as servicing partner, we can provide practical solutions.

There’s also the question of beneficial owners themselves, some of whom want to recall all their securities and exercise their voting rights, sometimes only for specific companies or only for key topics. However, we need to consider liquidity issues if everyone recalls securities around the time of a General Assembly.

In the end, even though we try to do whatever the client wants we have to consider whether it is possible from a technology perspective, and end-investors need to ensure that IT systems can handle the collateral rules they define.

RZ: Harpreet, I just wanted to look at something that we’ve talked about it, we’ve all had to deal with, which is exclusions.

That’s been the kind of blunt tool that had been used either on the front end initially with the investment management side or as securities lenders where it’s excluding assets lender or collateral things. We also talked about the journey and the individual pathway, so part of what Jane was outlining and you talked about how people are at different stages. How do you approach this kind of spectrum of clients with different expectations or at different parts of the journey?

HB: As a service provider our goal is to assist all of our clients on their respective journeys, when you have clients today that are keen on ensuring that the intersection points are appropriately addressed and aligned with their ESG strategy, then you need to position your product to be able to meet those needs, which we have done through relevant technology developments. Reiterating, the most prominent factor that clients are still mostly focused around is voting, and you can understand why given the increasing focus from regulators and asset owners to be active stewards and drive positive change.

RZ: It goes back to Jane’s point about stewardship being around for a long time and now being even more enshrined in European regulation, really forcing people to do things.

HB: Yes, it’s about driving positive, sustainable change through engagement with the corporates rather than just disinvesting particular names. As a result, we do have a greater number of clients today that want to take up the ability to recall loans over voting dates- a feature that has always been available but now supported with enhanced technology and tools, enabling the adoption of a more customised and flexible approach.

On the collateral front, we have clients that have chosen to adopt a blunt approach and align their collateral schedules to the same ESG standards that they’re applying to their long portfolios, albeit it is very much via exclusions, but then equally, we also have clients that have not chosen to apply any ESG screening on their collateral at this moment in time. That could change into the future.

We spoke earlier about what we need to think about as we move forward. On the collateral journey, the blunt approach, if adopted at scale could have an impact on market liquidity, a concern that was initially flagged but fortunately hasn’t yet transpired.

DR: We have had much discussion with our clients on this topic because technically, collateral is a protection. We continually remind them that collateral only belongs to them if there is a borrowing default and you have to sell it to buy back the position you lent or offset the economic loss.

Even today, a lot of clients have this type of understanding regarding collateral risk mitigation, because as you said, it’s easier and also because applying stricter criteria on what collateral is eligible, we will be back to square one where the end-investor needs to define a clear ESG policy. We need to demonstrate the available solutions for the beneficial ownersand assist in building them a tailor-made product.

RZ: So, I guess what I’m hearing from all of you is that really the foundation starts with the portfolio construction and securities finance has to always follow on from that rather than lead or be concurrent with. Customers have to decide what their portfolios are, what their key themes are, what their objectives are in doing that and then after having constructed that, it’s up to the service providers to do their best to meet those requirements as and when they arise.