As Chief Investment Officer (CIO) of Amundi, one of the world’s largest asset managers, and a highly respected economic author and commentator, Pascal Blanqué is ideally placed to go behind the numbers of the major, new headline responsible investment commitments that the €1.4 trillion Paris-based manager has made.
The ‘sea-change’ in asset management, as Amundi calls it, has been influenced by a shift in ESG client activity backed up by revelatory in-house research; notably a recent report on the impact of ESG investing on equity asset pricing, titled: The Alpha and Beta of ESG Investing. One of its main findings is that when an alpha strategy is massively implemented, it becomes a beta (market return) driver. In Europe, the report says that the mobilisation of institutional investors to ESG investing has impacted demand mechanisms, with a subsequent effect on prices, thereby triggering a performance premium.
Consequently, Amundi has made three top-level investment policy statements.
Firstly, by the end of 2021, all of its actively managed open-ended funds will have to maintain a higher ESG score than their benchmark index.
Second, Amundi is moving to 100% ESG research coverage of the securities in its portfolios and benchmark indexes – some 8,000+ companies.
Third, it will have an integrated ESG voting strategy for all the companies it owns by the end of 2021. Last year, it voted at some 2,500 corporate AGMs.
The ESG shift reflects what Blanqué calls an acceleration of two converging forces. The first is that fast spread of ESG among institutional investors, and into the retail investment sector.The second is the internal practicality of mainstreaming ESG across an investment firm to reflect this client drive; meaning how does the fund manager rethink the set up between so-called extra financial analysis and traditional investment analysis. The output of these ‘drivers’, he says, can be plotted across three axes.
He describes the first axis as the continuation of the traditional ethical exclusion approach and a rapid, related shift towards corporate ‘engagement’ for results in changing unsustainable corporate behaviour: “Generally speaking, this is a move from a static approach to a dynamic ESG approach.”
The second axis, he calls “price signalling”, which includes asset shifts into areas like green bonds and impact investing. Both of these approaches, he says, operate, to an extent, outside of the classic risk and return consideration of a fund manager.
The third, fast-rising axis, he says, is bringing ESG into the portfolio universe and the risk-based approach of asset management: “I’ve been a strong advocate, starting with the work we did with AP4 (Swedish pensions reserve fund: Link to RI article) and FRR (French pensions reserve fund) that there are ESG issues that should be seen as a pool of poorly remunerated risks, at least for the moment. The probability that they materialise is high enough that action is warranted for a long-term investor. Those risks are idiosyncratic and asymmetrically distributed across corporates, so they are powerful forces. The main message behind this is that with the risk-based approach we’ve seen that there is no longer a trade off – or a perceived trade off – between commitment to some of the major ESG causes
and portfolio considerations.” Much of that work was led by Frédéric Samama, Deputy Global Head of Institutional & Sovereign Clients at Amundi, and AP4’s then CEO, Mats Andersson. They dubbed the outcome a free option, or quasi-free option, on poorly remunerated risks, in that case carbon. By screening a portfolio to reduce the carbon footprint, and at the same time constraining the tracking error, you outperform if/when re-pricing comes. You get the underlying initial index performance if it doesn’t.
Blanqué believes much the same can be done on water need/exposure as a pricing issue, and should also be back tested to see if it works [ex-post] for tobacco companies.
But, he says, the ‘context’ for all of the ESG-related investment decisions outlined above does not make this work easy to do: “Firstly, we’ve got to deal with cultural or geographical realities. i.e. the extent to which one size fits all. They say you can’t manage what you can’t measure and you can’t measure what you can’t define. We’ve got some problems of measurement but also some problems of definitions. If you take the example of the governance ‘G’, there is consensus across some metrics, but some clear peculiarities. The Japanese understanding of the G is very specific, for example. It’s more linked with trying to reduce excess cash at the corporate level.”
On the first axis of increased investment engagement, Blanqué says there is a series of big, important practicalities to deal with: “The impact of ESG in the dialogue with corporates, through engagement is a fast-rising component of our business. We need to organise that dialogue with corporate CFOs, and our own ‘casting’ in terms of who is involved: lead portfolio manager, traditional analyst or ESG specialist. Then we have to get our voting process right.”
Blanqué says in practice this means the investment team thinking: “How do we really engage with a company on the issues that we want to move forward? And how do you organise meetings with the 500 largestcorporates across Europe, because given our size we’ve got some large exposures? You also have to look ‘systematically’ at some key messages you would like to send to the market in the process. We have embarked on this; for example, sending a clear signal to all companies we invest in that we do expect them to get an ESG rating as a basic step.” Blanqué is conscious that a company’s ESG rating hasn’t always corresponded to whether investment problems can be predicted. But he believes it is ‘a start’ as a proxy for risk management and business potential: “To give a very practical example, we’ve been looking across the firm at whether the ‘governance G’ factor is a credible, soft, leading indicator of something going wrong at a company. If you go back to stories like Volkswagen, typically it is being seen as a business ‘case’. Something we were not used to doing, but now do, is systematically review across all of our portfolios the soft signals coming from the G. These can be quite peculiar in nature though. It’s not just a risk question though. It’s also about a more ‘active beta’ approach. For example, dynamic engagement should lead ultimately to value creation if corporates change their position.”
On the second ‘price signalling’ axis, Blanqué says there are numerous megatrends such as the energy transition, technology disruption and political currents where ESG factors are either the driver or a significant force. He says: “To take another practical example, we’ve got an investment process in a fund called Global Disruptive Opportunities, which looks at various value chains across different sectors where existing companies will have to change, and it’s a bet whether they will adapt and survive, or whether we should be betting on new emerging players. It combines themes like technological change and environmental regulatory changes that are basically challenging business models alongside secular stagnation-related themes like demographics, debt and ageing. We’ve been thinking of the changes in the political landscape as drivers, but protectionism, for example, is not included because the linkage
between ESG and some political change is not that clear at this point.” Asked whether he thinks the commitments by some large asset owners to align to the goals of the Paris Agreement, decarbonise portfolios and seek low carbon investments could be a feed-in loop here, Blanqué believes they could: “The main change we’ve seen is that many large institutional entities now have to take a stance on these issues and are defining a policy position and methodology. To an extent, this is because of external regulatory and legal pressure. For others it’s a natural tie to who they are: public bodies or trades-union based organisations. What has been powerful is the coalition force of big asset owners from Australia, the US and Europe. That said, many smaller tier 2/3 institutions are still in the phase of thinking through their stance.”
RI asks whether this last point means the investment case for such investments is still unclear.
Blanqué replies: “These smaller institutions are still, I would say, in an educational, experimental phase. It would be wrong to think that everybody is running at the same pace.”
The growth of the green bonds market is another example, Blanqué says, of this development of asset price signalling.
The fund manager launched the world’s biggest green bond fund, the Amundi Planet Emerging Green One (EGO) in partnership with the International Finance Corporation (IFC), which raised $1.42bn by its close last year from a raft of institutions, and is expected to deploy $2 billion into emerging markets green bonds over its lifetime.
But Blanqué points out that the EU alone has outlined an annual €180bn funding gap to reach its climate and energy targets, and that it needs large amounts of private capital to bridge it. New regulation such as the EU Sustainable Finance Action Plan, he says, will clearly need to be allied with asset generating policies: “Originating assets is one of the great challenges. In thegreen bond space you currently have a question over debt issuance, because we’ve seen numbers flat-line last year. But in the renewable energy space you’ve got big demand across the globe but a lack of assets.” He says this is why the manager created Amundi Energy Transition (AET), a joint venture between Amundi (60%) and French energy giant, EDF (40%), which has raised more than €500 million in equity capital from institutional investors to finance infrastructure projects for energy transition across French industries and regions. The European Investment Bank and Crédit Agricole Assurances are the biggest investors, giving AET an investment capacity in excess of €2 billion, including leverage. AET aims to invest more than €600m in green projects in France. To date, five investments have been made with Dalkia, the French leader in energy services and heating networks, financing more than 150 gas-powered co-generation plants for industrial sites and local authorities.
Pascal Blanqué: “It’s unique actually. It’s an asset management company staffed with EDF and Amundi people. The idea behind it was basically to facilitate access to the origination of assets, because demand is there, assets are not. The beauty of this solution is that you’ve got assets generated by EDF, so that in terms of credit and asset analysis it’s a plus from an investor standpoint.” Amundi packages and manage the funds for the end investors: “It’s an interesting rethink of the model of what an asset manager might do in terms of effectively bringing clients to a financial asset and then holding it. In reality we are a machine for recycling excess savings or reserves and channelling them into investment, however we do that. But it’s not easy to build those kinds of financial ecosystems.”
Blanqué says such projects can be replicated at a regional level, and that Amundi plans to do this backed by client interest. He declines to comment further, but says there is certainly ‘need’ in emerging markets,
particularly those countries where there is no ecosystem of pension fund investors.
The third axis of ESG integration into the risk/return process of portfolio construction across Amundi’s product range, goes deep into the Alpha and Beta of ESG Investing research paper. Blanqué says the paper shows that until 2014 the contribution of ESG, and their sub criteria, in terms of performance and risk was heterogeneous and even negative. He says: “There was no signal. Then, the regulatory and legal environment tightened, and starting in 2014 there is a positive signal along the three axes I’ve just outlined across performance, risk and skewness. But, the conclusion was that it depends on the regions you are looking at as to which factors, E, S or G are more relevant in a particular environment. The second conclusion, which is very investment related, is that ESG comes always with high tracking error. In that sense, actually, it’s a choice, a clear bet against a classic benchmark. This provides the link with active management. Taking an ESG stance is an active bet.” Blanqué believes the regulatory environment will continue to firm up, with strong pushes by most governments, including across Asia. He believes the priority here should be on disclosure, which will start to organise ‘a real data market’, although again he points out that consensus is not easy: “The contrast between G and, let’s say, S is probably the trickiest one, just starting with simple definitions. How, for example, do you define, measure and approach inequality? It’s not consensual globally, and it’s therefore, no surprise, you’ve got various indicators that destroy any consensus.”
However, generally speaking, he says, the trend is in the right direction and will probably mean more consolidation among ESG data producers.
Given Amundi’s research-backed ESG move, RI asks both Blanqué and Stanislas Pottier, Amundi’s Chief Responsible Investment Officer, what claims they hear about ESG in an investment context that they findunrealistic? Pottier responds: “It’s not a direct answer to the question, but I would say I hear a lot of blah blah and very imprecise things about SDGs and impact investment. I think that people are really talking too much about them without having got to grip with what’s possible, reasonable and realistic. We need to be honest on causality chains and additionality. It’s unlikely that we will be able to report precisely on the exact outcome enabled by the buying of such an asset, or an investor in a certain fund or stock or whatever.
“I think there are stories about the link between performance and ESG that lack humility.”
The other thing is also the thinking that all of a sudden that because governments don’t have the same resources that they used to, and they’re not dealing with the right scope of areas, that corporates and mostly financials should take full-fledged political responsibility. We have a responsibility that we have to manage. But there are areas where we can’t take decisions in place of democratic political institutions.”
Blanqué adds, plainly: “I think there are stories about the link between performance and ESG that lack humility; as simple as that, even if there are clear links.”
Pottier adds: “Interestingly, in the quantitative study on ESG as a performance factor, the S pillar really only started to be a clear signal fairly recently in 2016 in Europe.”
The practical challenge as CIO with his portfolio teams, Blanqué says, is to incorporate/integrate information given in an ESG rating and related analysis in order to get a better understanding of the sources of risk in a portfolio.
He says the ‘progress’ has been that portfolio managers now have access to these exogenous inputs, but need to move to a phase where they have an input in the ESG analysis itself: “You will see a convergence of the profiles
of analysts, actually, in the not too distant future. It’s not the case yet. But forces are coming into place.” He sees another area of convergence between factor investing and ESG data as a pool of risk factors. Amundi’s team has started to incorporate related data in its quant information inputs. Blanqué says that what’s interesting at this point in the economic cycle is ‘sustainability’ as a broader concept: “When you talk with, let’s say, traditional PMs, they are digging at this point in the cycle into quality stocks; they’re trying to find sustainable earning stories, sustainable business models, sustainable fiscal paths in the case of emerging markets, etc. They tend to mean ‘sustainable’ as opposed to leveraged, artificial, steroids-based returns. But what strikes me is that they use the word sustainable. It naturally brings ESG considerations into the discussions. I suspect that behind, the ‘quality’ factor for companies you will see more and more ESG considerations taken into account.”Asked why it is that ESG has suddenly taken off among investors in recent years, Blanqué is honest in suggesting that alongside the better data and increased regulations, the investment industry is also mimetic and prone to herding. But, fundamentally, he sees the sustainability sea-change as a legacy of the financial crisis more than ten years on:
“Today’s macro-financial regime is under pressure. There are cracks at various levels and changes in the perception of patrimonial capitalism alongside challenges on the purpose of corporates. Central banks are under scrutiny. My general view is that the macro-financial regime as we used to know it starting with Mr Volcker on the central banking side, going through the ‘90s bursting of private debt driven bubbles, is under rising pressure, which reflects societal and governance-led topics. The S of ESG is not coming out of the blue. It’s linked with topics like inequality. From this standpoint, ESG reveals some of the cracks in the system.”