Laurent Ramsey: The Transition to Sustainable Investing

Pleasure to be with you.

Well, I think there are many issues. A lot of the focus has been on climate, and obviously that's an extremely important issue, but I think it's been a bit at the expense of other areas that are also very challenging. You can think about biodiversity loss, which can be extremely costly over the long term for the planet. You can think of water pollution and water consumption. You can think of inequalities. So there are a lot of very complex issues we need to face, and they represent different types of challenges. Typically, climate is an extremely important one and one that we can measure relatively accurately given the extensive research that has been done in this field. Whereas when you talk about biodiversity loss, it's a bit more complicated to measure, it's a bit more complicated to find relevant data because disclosure is pretty poor, and it's also more complicated to actually articulate the real impact on the corporate world. So there are other dimensions that are extremely important. We need now to get together between science, professionals, the corporate world, regulators, to try to have the same type of momentum that we have now. The other set of challenges are obviously linked to transitioning. So once you have identified the challenges and measured them, you need to embark on the journey towards a better tomorrow, and that has risks. You can think about physical risks when you talk about climate, you can think about social impacts, you can think about consumption behaviors. But I think the important thing that we need to keep in mind is that the investments we make today are geared towards avoiding irreversible costs tomorrow, and that I think is the challenge when we talk to investors, to our clients, is to make them realize that that's the way forward.

Well, I think if we don't have a functioning planet, if we don't protect and nurture the capital that the planet is giving us, we're going to have dysfunctional economies, and that's going to translate into many different challenges. You're going to see rising inequality, migration, and also eventually, as far as we're concerned, it's going to translate into the price of financial assets eventually, and therefore our ability to generate returns for our clients so that they can face the liabilities they're going to have when they retire.

Yeah, I think so. And I think this is what is creating the momentum we've seen in the last two to three years, where more and more investors are allocating their capital towards the more responsible part of the economy, trying to do smart investing by focusing on themes that address the challenges, being environmental or social, that we are facing, and trying to harvest over the long term that sustainability premium that exists today. So in our conversations with clients, it's a question that comes up repeatedly, regardless of geography, even though regulation is more or less mature depending on where you're looking, regardless of client segments, it's a conversation we have in almost all our discussions with our clients. Now, the good thing about it as well is that it's not only about doing good, it's also about doing well. And I think people realize that taking into account non-financial factors in deploying the capital of our clients is only providing more insights to better mitigate the risk or generate performance for our clients. So it's actually becoming part of our fiduciary duty not only to look at risk and return but also to look at the impact of our investment decisions because they will translate, we believe, in a better risk-adjusted return for our clients. So not only you put all the chances on your side, but on top of that, you do good. The role of active management is to try to analyze as many relevant data that have a material impact on the price of assets, and today it is very difficult to argue that some of those ESG dimensions do not have a material impact on the price of assets. They do, some more than others, and therefore again, it is part, as an active manager, of our duty to look at those and incorporate them the same way we incorporate different types of dimensions such as valuation of assets or the quality of the management.

Yeah, it is. And in many respects, I mean, as you know, we're one of the leaders in thematic investing globally, and we embarked on that journey in the mid-90s. We started to deploy more environmentally focused thematic strategies such as water in 2000, so we have a 20, 21-year track record on this. Then timber, nutrition, clean energy, and others, and over the long term, they outperform the world equity markets by a substantial amount. So it has translated not only by allocating capital to companies that have an impact and because of the products and the solutions that they provide to the challenges of the environment, but it has also had a side benefit. One of the big challenges we have in the industry, I think, is short-termism, being measured quarter after quarter on our ability to generate performance over a certain benchmark. Now, when clients allocate their capital to a theme they fundamentally believe in, they can stem the volatility of the market over the short term, they go in for the long term, and therefore they allow themselves and then allow us as managers to harvest the premium. A very concrete example of that is if we look at our thematic offering, and more particularly the environmental thematic offering, during the big crises that we've seen, the big financial crises, whether it was the dot-com bubble burst in 2000, 2001, whether it was the global financial crisis, we have not seen clients pulling out from those strategies, whereas they redeem almost everything else to go into cash. So they suffered drawdowns but they rebounded with the market, and today they're very happy investors. So I think the dynamic it creates in lengthening the time horizon of our clients, together with the secular risk premium you have, is making this a win-win solution for both doing good and doing well for our clients.

I think more and more we see clients, whether they are private clients or institutional clients, willing to have a purpose when they invest. Having a financial profit is not good enough anymore. And therefore they do care about it. They have different dimensions sometimes that they care more about than others, but they definitely want to put purpose at the center of their investment focus. And we see that regardless of whether there are high net worth individuals or whether there are pension plans acting as fiduciary, sovereign wealth funds, or government institutions.

Definitely. And even clients that we won before, they were really looking at that and gave us a mandate which actually did not incorporate those dimensions, are coming now today and asking us: 'So how do you adjust now your strategy to incorporate the analysis of non-financial factors? How does that affect my portfolio? How are you integrating those analyses in your decision-making process?' So again, it's a conversation we have with literally any single client today.

Yeah, I think in certain cases they are. I think the general principle we have is that we need to be active owners of the companies we're investing in, and being an active owner means obviously exercising your voting rights but also engaging with those companies. And the biggest power of engagement is to accelerate the transition because first you force them on a path towards being a better company, and at the same time you harvest this sustainability premium that I was talking about before. There's a re-rating of those companies because they access larger pools of capital, they lower the liability risk, so there's also a financial element to it. So as a principle, we prefer engaging to excluding. As a client of ours told us once, excluding is like throwing your garbage on your neighbor's lawn. So we exclude in certain cases. We exclude when a sector by design cannot transition. If you're a coal miner and you mine coal, it's very difficult for you to reinvent yourself. So typically, we have a blanket exclusion from all our portfolios of this particular sector. Then we apply another set of more stringent exclusions on controversial sectors when we have solutions that by design are sustainable or thematic. So there's another set of exclusions for those strategies that label themselves and have intentionality to be a solution for those environmental and social challenges we have, because again, we think that the exposure to those controversial sectors is irreconcilable with the intentionality of those strategies. And don't get me wrong, the assets we have in those strategies is important and it is growing year by year. Now, the third element of exclusion is linked to engagement because obviously, unlike passive investors that can vote, they can engage but they can't divest because they have to replicate a benchmark. As an active manager, if you feel that the path towards transition is not the one you expected or is not happening and that your engagement has failed because of the unwillingness of the issuer to change, then you need to divest and you need to exclude this company. So it's important that your engagement is framed in a way that you associate it with concrete targets and with a timeline, and failing to reach those targets or this timeline needs to have consequences.

Yeah, I hope. I hope that actually in 10, 20 years we won't talk about sustainable investment because it's going to be part of what we do.

It's a pleasure. Thank you.