RI interview: Joachim Faber, CEO, Allianz Global Investors: the gradual rise of ESG

Responsible Investor talks to the head of the world’s third biggest fund manager.

There is a misconception that ESG in financial services has limited ‘buy-in’ from senior management. Joachim Faber, chief executive officer of Allianz Global Investors (AGI), the third biggest fund manager in the world, with assets of €1.4 trillion, and a member of the board of the Allianz group, bucks that notion. Alongside charity work on Aids in Africa in his own spare time, Faber is also working with the German Ministry for Environmental Affairs on financial solutions to climate change issues. AGI has always had a strong ESG element running through its fund management offering, whether it be through London-based, RCM, AGI France, or a corporate governance strategy run by AGI Korea. Faber is pragmatic, however, on what he says is “a gradual but steady move” of ESG factors into institutional fund management. He says that when he looked for the first time at sustainability issues 10-15 years ago, the problems were as acute as they are now: “Not much has changed regarding the issues, which is a great concern. But it’s interesting and encouraging that over the last ten years there has been a gradual change to put ESG into investment. Some people thought the financial crisis would knock this back. I don’t think you can say this. You see more and more substance, which is really important.”
Asked whether asset managers themselves should take more initiative to push forward ESG initiatives,Faber says fund managers are not missionaries: “At the end of the day, whatever we do has to create value for our clients. We are in the business of managing other peoples’ money and so we are following the guidelines that are given to us by asset owners. For those clients that are interested we want to have an excellent offering. In the RCM investment process we also recognise that as an overlay for our entire research, sustainability is an important theme.” As a group, Allianz has made significant public commitments to sustainability, notably on climate change issues. Is it realistic to be sustainable in one part of the business, while following the client lead on the other? Faber says: “It’s an interesting point. We have three basic constituencies. Out of our €1.4 trillion in assets, €300bn is managed for Allianz, €750bn is managed for institutional investors, and €300bn for retail clients. It’s clear that with Allianz’s group money we are very focused on making sure that the insurer understands what kind of sustainability risks it has, and they typically follow our lead. We point out to institutional investors where we believe there is sustainability risk, but at the end of the day it is their choice. On the mutual funds side we have a better handle on this, and we have sustainability principles that are overlaid on investment strategies and so are playing a role.”
The Allianz GI chief says one key reason why ESG has

become important is the growing evidence that from a pure portfolio management point of view it is an investment consideration that does not hurt returns but can also offer a better risk/return profile. A quantitative study released in March this year by Risklab, part of AGI, found that the integration of ESG factors into portfolio construction could significantly reduce long-term investment risk and potentially boost returns because of a high probability that companies that don’t manage ESG issues will be more volatile. Faber says: “This seems to me an interesting development. I have no doubt that ten years from now you will have a better academic foundation for the value that sustainable investing can bring and you will see more investors follow. The Risklab study showed that you can get the same nominal return for a better risk profile. This was a quant study that should be of interest to anyone running money.”
AGI itself, however, is not a signatory to the PRI. Faber says: “That is an interesting observation. It has little to do with us not embracing this. But it’s also important not to be misunderstood. We are not running a purely sustainability focused asset manager. We are providing sustainability strategies in our centres of excellence and offering a range of products to customers who express interest. But we are not wandering around the world saying that sustainability is the only strategy you should invest in.”
He notes that RCM was one of the founding signatories of the Carbon Disclosure Project (CDP) 12 years ago, and that in the last 5 years, ESG criteria has become very important not just within the firm’s sustainability/eco trend funds, but also as an additional research segment used by all different portfolio managers. Another critical rallying point for ESG, he notes, is the increasing number of mandate request-for-proposals (RFPs) in which consultants ask the fund manager for more information:“This reflects the increased level of awareness with asset owners, but also by consultants, that to have a solid sustainability-based research engine is also a quality criteria for an investment process, which you would even like to see even if you are not looking for a sustainability mandate.”

“For pension funds as long-term investors we are in a difficult environment and their attention is on many other issues. That’s one reason why ESG is progressing slowly.”

But, as Faber notes, sustainability input stalls against the current, serious, short-term preoccupations of pension funds: “If you look at the two recent crises we have had in capital markets: 2001 and 2008, they’ve been extraordinary damaging for institutional investors. On top of that we have interest rates at low levels never seen before. So for pension funds as long-term investors we are in a difficult environment and their attention is on many other issues. That’s one reason why ESG is progressing slowly. Another is that while the asset management model is basically long-term, more and more of our clients measure on a short-term quarterly basis, and some ask for daily performance reports.”
Longer-term mandates are often posited as a solution to this issue. But Faber is unconvinced: “As active asset managers we have many unlimited contract agreements with clients. There has been a typical agreement that a 3-year track record is the industry standard metric for performance. But this is not what our investors always look at. Benchmarks are sometimes money market plus,

and yes, sometimes clients don’t give us the right time. But our clients are under permanent pressure from their constituents, corporate sponsors, etc, on deficits and performance, which, of course, are not trivial issues.” If anything, Faber believes responsible investment questions have to look much deeper at the regulatory background of pension and insurance investing: “What we are seeing today, and this could get more severe with Solvency 2, is that for 10-17 year liability durations you are forced to hold assets against risk parameters that are short term. This is wrong. For a large corporate pension fund with long liabilities measured against AA corporate bonds, but assets marked at market value, then it is not possible to be long term. The industry has to make sure that a duration of 10 years has the adequate measure and that the investor can take the right risk over that time based on a normal capital market cycle.”
He says the institutional investment industry also has to get realistic about its return expectations. Clients, he says, that are shooting for 15-25% returns per annum are not recognising the real world. Likewise, he says, for CEOs of banks promising 25% return on equity. Neither, he says, is sustainable. But it is also a problem for funds houses with analysts and portfolio managers pushing companies based on short-term promises. He says investors have to be more rational in their expectations of company strategies and revenues.” The asset management industry, he says, also has work to do to rebuild confidence with clients post financial crisis, and he expects to see more activism on their part as capital stewards.
“If you believe the polls, asset managers are coming out quite low in terms of trust. We have to address this issue even if I think it’s unfair because fund managers have, all in all, done well. Overall though, I would say the entire financial industry has not reacted well to the crisis. The banking industry, for example, should have been much more helpful in trying to address the roots of the crisis, and not leave this to governments who perhaps have less knowledge of finance and capital markets. I can see more activism coming, but one has to also recognise that the demand for higher shareholder activism, particularly in Europe, is notwithout its problems, because in most countries we have an acting-in-concert ban. This is something the EU should look at for the final version of its Green Paper on corporate governance. We have enough power as shareholders if we can act together, but it’s problematic because of these insider-dealing concerns. If there are serious governance issues in a company and we’re raising our voice alongside 30-40% of other shareholders that makes an enormous difference.”Looking at Allianz’s ESG business, Faber notes that AGI France and RCM have different approaches: “The analysis done in Paris is very useful: it’s Europe restricted and very bottom up, looking at companies. RCM is looking more at mainstream analysis and ESG risks and opportunities that it believes have not been fully priced by the market.” AGI Korea’s fund is an interesting activist on governance issues such as shareholder rights, which Faber says has created a virtuous circle attracting investors to Korean companies and boosting fund performance: “We’ve offered this Korean equity fund to clients around the world, and AGI Korea is starting to looking at Chinese companies on the same governance issues, which is, of course, a special challenge.” Coming back to his role in looking at environmental issues with the German government, Faber notes that a as a listed equity fund manager Allianz GI is at the end of the development chain of new technologies, after other more critical seed and development investment stages. As an insurer, however, the Allianz group has already committed about a billion euros in pre IPO renewables companies. He believes that one of the most important environmental financing questions is whether or not in the next 10 years there will be a firm technological answer to carbon capture and storage (CCS): “China is likely to continue to burn coal for electricity, as do Poland or Germany. You know that if this is happening our CO2 levels will not come down. If a company is researching CCS technology it needs backing with early stage venture capital, either from big industrial holdings like Siemens, or the government (via KFW, the German governmental development agency). Private equity houses won’t take the early stage risk. This is the current blockage that needs to be looked at.”