By Antony Michels
Interest in ESG investing is blossoming as companies search for purpose beyond profits.
WHY: You can do good and do well. Academic research cited by DWS “provides strong evidence that environmental, social and governance factors positively influence corporate valuation and investment performance.” Also:
- “ESG data can potentially help mitigate against both idiosyncratic and systematic risks.”
- 90% of ESG study results demonstrate that prudent sustainability practices have a “positive or neutral influence on investment performance.”
- Key takeaway: Think about ESG as another risk factor in your screening criteria that aligns closely with other credit risk factors. This alignment will only strengthen as more investors employ ESG criteria.
Hard data: DWS says that, historically, moving higher in ESG ratings in a portfolio has not resulted in a significant loss of yield opportunity. Here are some facts and figures to chew on:
- Bloomberg Barclays Credit 1-3 Year Index recently yielded 2.16% …
- Eliminating what DWS ranks as “ESG true laggards” and “ESG laggards” produced a yield of 2.15%.
- Eliminating everything except “true ESG leaders” and “ESG leaders” resulted in a yield of 2.03%.
- The DWS ESG Liquidity Fund recently ranked No. 1 on Crane Data’s list of institutional money market funds, with a seven-day yield of 2.15%.
- Starbucks, which attended the NeuGroup meeting, worked with DWS to launch the ESG money market fund in September 2018. The fund has $459 million in assets.
- Fitch says global assets in ESG money funds increased 15% in 2019 H1 to $52 billion.
Soft but significant: JPMorgan Chase CEO Jamie Dimon and the Business Roundtable are promoting sustainability as part of a rethink of the purpose of a corporation that emphasizes the interests of all stakeholders and not just shareholders.
- DWS noted this shift in part reflects the recognition that consumers, especially young ones, place real importance on the values of the companies they patronize.
- Bottom line: More companies will embrace sustainability to boost their brands and make money. Those companies and their investors will likely outshine peers that fail to adapt to this new paradigm.
HOW: DWS outlined a variety of approaches for corporates that want to incorporate ESG into their investments. Think of a ladder that starts with a passive, minimalist approach to ESG and climbs toward more active commitments designed to have significant impact:
- Rung 1: Avoid the bad stuff. It’s called negative screening and it means avoiding controversial sectors like coal and tobacco. Check out an ESG money market mutual fund to dip your toe in the (clean) ESG water.
- Rung 2: Embrace good stuff. Consider an ESG separately managed account (SMA) for excess cash and review the criteria based on sustainable development goals (SDG) as defined by the United Nations Development Program, including affordable and clean energy and responsible consumption and production.
- Rung 3: Carbon offsets. Think about purchasing renewable energy credits (RECs). Or buy renewable energy from operating projects. DWS notes the former is a pure expense on the P&L and the latter may mean paying a premium for the energy purchased.
- Rung 4: Higher impact solutions. These include using strategic cash to reach specific goals, such as tech companies investing in affordable housing.
- Rung 5: The investment management model. The idea here is to purchase assets like renewable energy plants and manage them to achieve sustainability goals and an economic return.
- Rung 6: The corporate venture model. DWS described a pooled investment vehicle that would make direct investments in technologies and products to promote sustainability generally as well as for the companies investing. This also is designed to produce economic returns but involves more risk.
This sparked a discussion of what, if any, role treasury teams play in their companies’ venture capital arms.
WHO/WHAT: In a live poll at the NeuGroup meeting, 40% of those participating said their companies are currently exploring ESG investing.
- Another 12% are adopting and integrating ESG investing to the extent possible, while 4% are implementing or testing it.
- More than a third (36%), though, said ESG investing either does not interest their companies or is outside of treasury’s scope to pursue. Another 8% have evaluated and passed on ESG investing.
- One presenter said the only reason his company is not invested in ESG money funds is its current decision not to use prime funds, something he said will change when it has more stable cash balances.
- Another NeuGroup member told the group her company invests in carbon credits as part of the company’s allocation to less liquid, higher-return assets. The company plans to double that allocation this year.
- One participant said that in addition to ESG investing, his company is exploring an ESG-linked debt structure and revolvers with a pricing grid tied to the company’s own sustainability scores.