Welcome to this, our first Sustainable and Responsible Investment (SRI) Annual Review. Over 2015, we have seen a strong and continued interest internally and externally in Allianz Global Investors’ responsible investment and stewardship...
Welcome to this, our first Sustainable and Responsible Investment (SRI) Annual Review. Over 2015, we have seen a strong and continued interest internally and externally in Allianz Global Investors’ responsible investment and stewardship activities which, has served to further underscore our long standing commitment to responsible investment. We have established a deeply knowledgeable and experienced team of SRI experts who have enabled Allianz Global Investors to meet client needs and deliver the broad range of activities that help our investors to understand, appreciate and better integrate environmental, social and governance (ESG) considerations within their investment decisions and processes.
Over the last few years, we have successfully embedded ESG research, ratings and the ESG Team’s viewpoints in our global communication platform, Chatter, a global system that enables investors to communicate their views and opinions on stocks, sectors, asset classes and markets in real time to support investment decisions. Chatter has been instrumental in enabling the ESG Team to engage with fund managers and fundamental analysts on our stewardship and proxy voting activities supporting informed and considered voting decisions and engagement with companies on key holdings in our active strategies. To further embed ESG research with our fundamental analysis and to go beyond analysing ESG ratings, we have focused our ESG research on identifying material investment drivers developed in conjunction with our sector analysts to identify material ESG tail risks that have the potential to impact the investment case of an investment. Topics covered by our investment drivers have ranged from stranded assets to how the millennials generation is changing how food and beverage companies have to rethink their products to meet changing consumer tastes for healthier eating options.
Our thought leadership activities have focused on working with like-minded investors to bring about long-term, sustainable change for the investment industry. Our three year commitment and work with the University of Cambridge Institute for Sustainable Leadership Investment Leaders Group (ILG) has been an interesting and thought provoking journey. Collectively, it has enabled us to put forward concrete and practical solutions to the challenges being faced by the industry and in particular how ESG integration, long termism and transparency can be further evolved to holistically engage investors on ESG topics. Our ongoing support of the Sustainable Stock Exchange Initiative (SEE) and commitment to bring about positive change on ESG disclosure has yielded positive results. As lead on the SSE campaign to close the ESG guidance gap, we have successfully engaged with 23 exchanges who have committed to produce ESG disclosure guidance by end of 2016. We published a special climate change edition of our flagship ESG publication ESGMatters which focused on the Paris Climate Change negotiations (COP21) with contributions from senior thought leaders including the former executive secretary of the UN Framework Convention on Climate Change, Christina Figueres. Becoming signatories to the Climate Bond Initiative was a further reinforcing step in our climate change efforts.
We recognise however that ‘doing’ is no longer enough. There is now a clear requirement of asset managers for greater transparency and a demonstration of their expertise in understanding ESG issues. This report takes you on the first part of this journey and demonstrates our credentials and the blueprint we have built up over 16 years of doing SRI. Despite this, we will continue to strive for further improvement so that we can continue to deliver best SRI practice and solutions for our clients and contribute towards the market evolution of this exciting area of investment.
_______________________________
The era when ESG investing was seen by many investors as an underperforming niche, has come to an end. And a new era for Asset Management has kicked off in many areas of the world with ESG investing becoming mainstream.
The major change in ESG investing is the growing realisation that incorporating ESG factors into investment strategies does not adversely impact financial performance.
According to Eurosif’s European SRI Study1, all surveyed Sustainable and Responsible Investment strategies are continuing to grow, in aggregate, with no exception, and they do so at a faster rate than the broad European asset management market. Looking at the more conventional strategies, growth rates range from 22.6% (Sustainability themed) to 91% (Exclusions) between 2011 and 2013. Impact investing is the fastest growing strategy, registering 132% over the period. Over the same period, the overall European asset management industry has grown by an estimated 22%.
This Study also confirms that Exclusions has gone ‘mainstream’ as a strategy with, by far, more assets covered than any other strategy, and with the most consistent usage across Europe.
While the benefits of SRI in Europe started to be more obvious years ago and it is now in the majority of investor’s minds, other regions of the world are catching up.
Christian McCormick, Inter-Regional Senior Product Specialist
The number of institutional investors and asset managers incorporating ESG criteria into their investment decision making process has increased dramatically in the past ten years, with growth accelerating even further in just the last two. In 2014, there was $6.57 trillion of Assets Under Management (AUM) in investment strategies that incorporated ESG criteria into their portfolio selection process2. This is up from $3.7 trillion in 2012 and $1.6 trillion in 2005. Of this, $4.8 trillion resided amongst 308 money managers who offered specific investment vehicles with some form of ESG metrics used in the portfolio construction process. The remainder of the assets are in other investment pools and separate accounts of institutional investors. Based on a report by Cerulli and Associates, it was estimated that in 2014 ESG approaches accounted for 18% of total U.S. AUM of $37 trillion.
Of the major financial advisors, Morgan Stanley has taken the lead in promoting what they call ‘Impact Investing’, developing an extensive internal team to create research and to assist their advisors with money manager research with ESG considerations.
Bank of America, through its Global Wealth and Investment Management Division, which includes U.S. Trust and Merrill Lynch, has created an ESG Council and now purports to have $8.6 billion in AUM of client assets invested in ESG approaches3. Numerous U.S. based money managers are adding ESG and SRI funds to their line up and incorporating to various degrees the use of ESG metrics into their traditional stock and portfolio analytical framework. These include Blackrock, Wellington, Calvert, Clearbridge, Capital Group, and Neuberger Berman.
Despite the rosy numbers, the U.S. market still has a lot of unanswered questions. First and foremost is how is ESG being measured and defined? For example, a simple exclusion of Sudan based stocks or tobacco stocks would be counted under the ESG umbrella. Many of the investment vehicles tend to target ESG issues. Therefore, although it is safe to say that interest is growing, as are the assets behind ESG, there remains confusion and disagreement around terminology, what degree of ESG integration is needed for a strategy to be called an ESG investment, and how much is lip service on the part of investment managers versus actual action.
This presents a unique opportunity for AllianzGI to emerge as a market leader in the U.S. and provide some clarity. An interesting study by U.S. Trust in 2014 revealed that 75% of millennials and 63% of women feel that their investment decisions should express their values of better stewardship of the environment and social improvement (human rights, philanthropy, etc.).
In addition, besides the strong performance record of the AllianzGI Global Sustainability Fund, the body of research around answering the question of, ‘Does ESG investing mean lower returns?’ is growing and the evidence appears to be pointing to the fact that investors integrating ESG into their investment processes are not forced to give up performance.
_______ 1 Eurosif European SRI Study 2014 2 U.S. Sustainable, Responsible, and Impact Investing Trends 2014, US SIF, 2014 3 Newsroom/Bankofamerica.com
Asian markets are also becoming more aware of the importance of ESG factors and are introducing rules along the lines of the UK Stewardship Code, with Japan being the pioneer on this by launching the Japan’s Stewardship code in 2015. This code promotes sustainable growth and sets the stage for investors who sign up to engage in more meaningful dialogue and voting practices with companies.
Climate change and consideration for the environment has only recently become a serious item on the agenda for policy makers in the continent. In China, for example, coal is cheap and emissions are not expected to peak until 2030. China’s per capita consumption of electricity is 3.5MWh vs 12.9MWh in the U.S, which gives some indication of the expected growth in power demand. A national emissions trading scheme will be up and running in 2017 and renewables are being installed at unprecedented levels. However, they will not be enough to offset demand for carbon intensive power production in Asia over the next decade.
The increased importance of responsible investing and ESG integration brings meaningful opportunities to the asset managers and investment professionals who embrace this trend, as they begin to understand that companies that score higher on ESG factors are more likely to perform better in the long-term. At the same time, companies will also care more about integrating sustainability into their businesses in order to improve their market positioning.
AllianzGI is a diversified active asset manager with a strong parent company and a culture of risk management. With offices in 18 markets, we provide global investment and research capabilities with consultative local delivery.
We are an active investment manager servicing both institutional and retail clients around the world. Our business is diversified across equity, fixed-income, alternative and multi-asset strategies and diversified by region. This solid foundation, together with the support of the world’s largest insurer, helps us toward our goal of developing and maintaining long-term relationships with our clients.
AllianzGI manages EUR 442 billion assets on behalf of Institutional and Retail clients as well as EUR 56.7 billion Assets Under Advice1.
_______ 1 AllianzGI as at 31 December 2015
Sustainable and Responsible Investing is a combination of long-term economic value creation and a forward-thinking approach to environmental stewardship, social responsibility and corporate governance (E, S and G).
The reality is the world is changing; and with it, the world of investing is changing too. Defining and judging potential investments in financial terms is no longer the only approach to measure and understand investment risks and opportunities. We believe that by taking action, and raising our understanding beyond financial metrics and viewing investments through an additional ESG lens, our clients will be rewarded with improved investment decisions, whilst contributing towards creating a more stable, sustainable market and society.
Just as institutional investors have long term investment horizons, the long-term financial implications of extra-financial risks such as good governance, resource scarcity and labour standards are becoming increasingly apparent.
Sustainable and responsible investing offers effective risk management throughout the entire investment portfolio and value chain in order to:
Identify risks arising from material ESG factors in stock selection
Act as stewards of our clients assets via robust governance, engagement and proxy voting activities
Minimise reputational risk for our clients
Deliver sustainable long-term investment for our clients
ESG factors can significantly impact a company’s long term value. Only through successful integration of ESG factors can investors mitigate both their investment and their reputational risk, whilst potentially improving their risk-adjusted returns.