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As businesses take up the environmental, social and governance challenge, ideas on best practice, collaboration and regulation are yet to be settled. The world is looking to COP26 in November for some answers, but, before then, what can we learn from the insights and actions of industry pacesetters? Here, six experts comment on ESG’s effects on investment, ranging from private equity to fund administration and infrastructure.
Anne Foster, head of ESG, Quinbrook Infrastructure Partners
A passion for ESG issues started in Anne Foster’s teen years in Australia, spurring her university studies in environmental science. She later took a break from investment banking and asset management to launch a home goods business committed to tackling social issues ranging from modern slavery to fair pay.
Now based in London as head of ESG for the infrastructure-focused investment house Quinbrook, Foster says she has always been interested in “business that has ESG at its core, trying to find ways we can make businesses sustainable in all senses: both financial and sustainable for the world”.
“We are a climate investor through things like renewables, but there is so much more than just measuring emissions,” she explains. “It’s your wider environmental impact, your community impact, your workforce and training and all of these other aspects that are so critical.
“I’m part of the broader investment management team because at Quinbrook we don’t separate out our ESG team; we believe that ESG risk and impact should be assessed with every other risk and impact. That means it has to be integrated from the top-level management through to the investment teams, portfolio company boards and people who are there day to day. You have to be transparent and honest rather than pretending everything is already perfect, and the key thing to grasp is that ESG is not some feel-good add-on. It is a critical risk mitigation tool, and the value of companies is at risk if you don’t look after the ESG part of the business.”
Leslie Gent, head of responsible investing, Coutts
Gent combines her responsible investing duties with the role of head of product management and director roles at some of Coutts’ fund management firms.
“Six years ago, the responsible investing piece would have taken maybe 15% of my time; now, it is well over 50% of my time,” she says. “There’s just so much evolving in this space that the information flow is massive, and you need to stay on top of things if you’re trying to drive change and you don’t want to fall behind.”
The responsible investing initiative at Coutts started in 2015 when Gent and a colleague won management support for making it a central focus, and the firm’s head of asset management decided that, instead of launching a separate ESG product, Coutts should take the more challenging path of building ESG analysis into all of its portfolios.
“For the first couple of years, it was largely about getting buy-in from the investment team and training everyone up from asset management staff right across Coutts. It was probably only last year when I could hand-on-heart say it was embedded to the point where you can have autonomy in all your teams but know they are on the same page in terms of using ESG to drive real-life change in a way that adds value to our assets.
“That’s a challenge that never ends because nowadays I think your ESG strategy probably needs to be reviewed almost every six months.”
Stephen Muers, CEO, Big Society Capital
Founded by the UK government in 2012, Big Society Capital provides finance, ideas and expertise to organisations that support frontline social sector groups with the aim of achieving social as well as financial returns.
For Stephen Muers, running Big Society Capital is a natural extension of his background as a senior civil servant “trying to solve big, complicated social problems or public policy problems”. The emphasis is more on the social than the environmental or governance aspects of ESG, he says, “but these things all fit together”.
“A lot of ESG investing is about managing the investment risks around those issues, but we try to go beyond that by placing our priority on making a measurable difference on things like homelessness and financial inclusion and education,” he explains.
“At the moment, the ‘E’ bit is easier to measure because we have metrics for things like emissions and biodiversity loss, but we are further behind on the ‘S’ side as it is a lot harder to define and measure and know what really counts.”
A big lesson, he says, is that “if you see ESG as a fad that is going to go away – something you can look at briefly and tick a box and forget about it – I think you’re going to be in trouble.
“You can’t just focus on the metrics: always think about what is actually underneath the hood because if you don’t understand the real impact of an investment, it could come back and embarrass you and your investors.”
“ESG is not some feel-good add-on. It is a critical risk mitigation tool, and the value of companies is at risk if you don’t look after the ESG part of the business”
Anne Foster, head of ESG, Quinbrook Infrastructure Partners
Serge Krancenblum, group executive chairman, IQ-EQ
After a quarter of a century building IQ-EQ into one of the world’s largest providers of investment support services, founder Serge Krancenblum has devoted the past three years to two roles: leading the mergers and acquisitions behind his group’s growth, and guiding its corporate social responsibility strategy.
“The goal is to make sure we are a sustainable company, meaning I want my company to thrive and to be there in 40 years,” he says. “And the only way to do that is to make sure that you invest only in sustainable areas and that you are offering the market solutions that are sustainable.”
IQ-EQ helps clients such as private equity funds to assess their own ESG standing as well as measuring the ESG performance of potential portfolio assets in order to protect their reputation and value.
Amid a jumble of different ESG benchmarks and metrics, Krancenblum is more confident than many industry leaders that some shared ways of measuring progress will emerge.
“The holy grail is to develop more standardised ESG approaches so we can improve transparency, and I think the most promising work is being done by the World Economic Forum and the Big Four accounting firms,” he says.
“There is still permanent evolution in data and benchmarks but I’m optimistic because the new generation is demanding it, and we have already reached the point where if your investments are not ESG compliant you are in serious trouble.”
Matt Smith, partner, Foresight Group
When Matt Smith moved from investment banking into private equity with Foresight in 2010, the ‘ESG’ label was not yet in common use, but he says he was motivated by the same issues that now carry that name.
“I wanted to work with small businesses because you can really make a difference with them by helping to take their operations and make them sustainable for future generations – rather than simply trying to drive short-term profits,” he says.
“I think all of our investors buy into the concept that when you’re investing in businesses, you will create the most value by taking a long-term outlook. This is something that can no longer be put on the back-burner but needs to be at the forefront of every board conversation and the company’s whole strategy.”
Foresight was a finalist in several categories of the ESG Investing Awards 2021, which Smith credits to the group’s being ahead of the game in “embedding within our basic thinking the goal of making ESG improvements as a way to create value”.
“I think over the next three or four years, it will be something that everybody incorporates as an anchor to what they do in private equity,” he says. “It’s kind of sweeping the public markets already, and I think that’s going to filter down, starting with the big corporates then moving into big-cap private equity, then making its way through the rest of the financial markets. This will become the default way of operating.”
Bradley Davidson, ESG lead, RBS International
A personal interest in supporting sustainability and socio-economic development has led Davidson to take on an ESG leadership role within RBS International, but he is convinced that this area demands co-operation beyond the bank and its own clients.
“Reaching our environmental and social targets, such as the Paris Agreement, requires partnership and collaboration, so we continue to engage with industry leaders across our local markets and maintain a global view through my work with the UN Sustainable Development Goal (SDG) Young Innovators Programme,” he says.
Regulatory pressure on ESG issues has led investors to focus on the risks created by the climate emergency, “but there are also multiple opportunities for our customers in the transition to a low-carbon economy,” he says.
“Not only will investment be required to adapt our existing infrastructure, but estimates suggest that $6trn to $7trn of new investment is required to deliver on the Paris Agreement.
“At RBS International, we recognise our own responsibility to drive sustainable outcomes and are reviewing our own lending practices to see where we can incentivise investment that supports all stakeholders.”
Davidson believes that one of the biggest challenges will be the development of “a market where price reflects the true cost and, importantly, empowers the end consumer to make an informed choice.
“To achieve this, we must work with our customers to help them develop new measures of performance and effectively communicate this information to investors. The development of International Financial Reporting Standards created this language for financial metrics and we need to replicate that for ESG factors.”