Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
ESG integration is like ‘putting sugar in your tea
ESG may well be the most commonly used term in financial markets today, replacing growth, or quality in pitchbooks the world over. However, growth in regulatory pressure and concerns of ‘greenwashing’ have seen some experts calling for the end of the term ‘ESG integrated’ when it comes to defining investment funds.
Global asset manager Robeco has been heavily involved in ESG investing, even before the recent boom, integrating ESG factors into their investment approached since 2010 on the basis that they ultimately led to ‘better-informed’ investment decisions. Whilst the rest of the financial industry has followed suit, there is a spectrum and limited differentiation to the various levels of ‘integration’.
Robeco for instance is very much aligned with the UN Principles of Responsible Investment definition noting that integrating ESG considerations doesn’t actually have to reduce the universe of investments available to a manager, but rather must determine whether ESG risks are priced into an investment.
Their concerns, along with many others, is that the statement of ESG integration may lead many to believe that the underlying strategies are ‘sustainable’ or whether the integration is ‘provable’. Interestingly, many ESG integrated strategies could be anything but sustainable depending on their approach.
Their internal approach, which is highly qualitative, includes ESG risk in the valuation assessments of equities, with management noting they can “actually prove that we structurally integrate ESG” into our decisions. Those relying simply on an ESG score for a stock would find this extremely challenging.
They liken ESG integration to putting sugar in your tea highlighting that “if you claim to take ESG into account in investment decision making, but keep no records of the impact on your valuation, or fundamental assessment, it is difficult to prove that you put the sugar in”.
More scrutiny, such as that being delivered by the EU finance plan, is welcomed as is the growing focus on ‘double materiality’. This concept refers not only to the effect of climate change and other issues on profits and revenue, but also the impact of profits and revenue on climate change.
Ultimately it all comes back to the why, being why are we even talking about ESG? Are we trying to achieve better investment performance? Do we want to avoid investments for reputational reasons? Are we trying to change the world, or is it all of these things? Simple adding ESG integration without having a stated purpose is of little use to the end investor.
“The overall bar is being raised all the time, and what is deemed sustainable now might be deemed unsustainable in the future” they conclude highlighting that all progress is good progress.
