Sustainable investment and ESG
Within the world of investing, the term sustainability occupies an increasingly important place. Not only the absolute return counts, but also the way in which this return is achieved. Consumers, employees, but also regulatory authorities are looking more and more critically at how companies deal with sustainability.
To make this concrete, various sustainability aspects have been determined on the basis of which companies can be assessed. This is called the ESG rating.
Environmental, Social and Governance stand for Environment, Society and Governance.
Under Environment we include issues such as CO2 emissions, climate change, waste processing and responsible consumption of raw materials. Under Society, we consider working conditions, child labor and access to affordable healthcare. Governance includes remuneration policy, diversity and compliance with accounting standards.
Points can be scored for all of these. There are an increasing number of mutual funds that include only companies that score high on ESG ratings. On the other hand, companies active within the gambling and tobacco industries, arms trade or adult entertainment are actively excluded. This increasingly includes fossil fuel exploration and exploitation.
Noesis and sustainable investment
General: investment policy not specifically focused on sustainable investments, but with an eye for ESG principles
For more and more investors, SRI has become a relevant part of asset management. However, Noesis believes that the intrinsic financial consideration should not be completely subordinated to this.
However, the general investment policy of Noesis is not specifically focused on financial products with sustainable investment objectives, so-called impact investments or “dark green” investments. In addition, Noesis does not necessarily focus on financial products with sustainable characteristics or “light green investments,” as the sustainability risks and their effects on the financial performance of the investments are often difficult to assess. Where these adverse effects in the foreseable future could be demonstrably quantified, efforts are made to include them in decision-making. Furthermore, potential adverse effects of investment decisions on sustainability factors are not explicitly considered in the decision-making process, as they are not easily measurable. The investment portfolios set up by Noesis should therefore not be considered (fully) environmentally friendly or sustainable portfolios. Noesis is an ESG-neutral asset manager and does not engage in “greenwashing.”
Sustainability measurement individual companies and investment funds
When selecting individual companies and investment funds, including index trackers, in clients’ portfolios, a sustainability analysis in the form of the ESG rating could be one of the selection criteria. To determine the ESG rating, Noesis uses recognized external and independent providers of fund research and analysis.
For individual companies, the ESG rating of Financial Services Amsterdam (FDA) is relevant. Related companies are assessed on how ESG factors are dealt with. The sustainability risks in the field of ESG are examined from various angles, whereby twenty aspects are distinguished by FDA and assigned scores. A sustainability matrix is then created to quantify a company’s sustainability performance to identify leading and lagging companies in and within industries. The analysis is based on publicly available information, such as company statements, non-government publications and specific focus groups.
For mutual funds, including index trackers, sustainability analysis is used by Alpha Research and Sustainalytics, the latter published on Morningstar’s website. Alpha Research classifies mutual funds as “gray,” “light green” and “dark green.” Sustainalytics uses an ESG rating in terms of one to five so-called “globes.”
Notes on differences between types of (sustainable) investments
In terms of degree of sustainability, there are different types of financial instruments:
- Financial instruments that pursue (fully or partially) sustainable investments in economic activities that qualify as “environmentally sustainable. Especially the E (Environmental) of the ESG principles is important here. In short, this includes all activities that contribute to limiting climate change and/or climate adaptation. Examples include water management, generation and use of green energy, nitrogen reduction, CO2 reduction and circular economy.
- Financial instruments that can be considered sustainable investments. All ESG principles are relevant in this context: Environmental, Social and Governance. A sustainable investment is:
1:an investment in an economic activity that contributes to the achievement of an environmental objective (E), as measured, for example, by key resource efficiency indicators for the use of energy, renewable energy, raw materials, water and land, for waste generation, and greenhouse gas emissions, and for the impact on biodiversity and the circular economy, or
2: an investment in an economic activity that contributes to the achievement of a social objective (S), in particular an investment that contributes to addressing inequality, or that promotes social cohesion, social inclusion, and industrial relations, or
3: an investment in human capital or in economically or socially disadvantaged communities, provided that these investments do not seriously undermine these objectives and that the investee companies follow good governance practices (G), in particular as regards good management structures, relations with their employees, remuneration of the staff concerned and tax compliance.
- Financial instruments that take into account the main “adverse effects on sustainability factors. These main adverse effects can occur in various areas, for example with respect to the environment, society, employment, human rights, corruption and bribery. This may include excluding investments in certain sectors because the adverse effects on sustainability factors are considered too great.
- Financial instruments without the above-mentioned specific features, which are therefore not eligible to be recommended to (potential) relationships that have individual sustainability preferences. Since, as mentioned above, Noesis is an ESG-neutral asset manager, its investment policy does not specifically focus on the selection of the sustainable investments mentioned above.