“In challenging times, a good ESG culture helps, to ride the storm better.”
The environmental, social and leadership aspects are not only decisive for success or failure in the economy, but they are also increasingly becoming a key differentiating factor in the financial industry.
Dr. Pascal Botteron is co-founder and CEO of Green Blue Invest (GBI) SA, a Swiss company dedicated to the development of ESG investment solutions. The core offering of Green Blue Invest is composed of ESG investment products starting their evaluation from the quality of corporate Governance. Before founding Green Blue Invest, Pascal Botteron had been involved in alternatives, risk management, portfolio management and impact investing for the last 25 years in banking, consulting and as an academic. In particular Pascal has occupied several Global Investment roles at Deutsche Bank in Asset and Wealth management based in the UK and Switzerland and has been Professor and/or Lecturer at the University of Lausanne, the Swiss banking School, Thunderbird, the University of Zurich and HEC in Paris.
What does ESG stands for exactly?
ESG is a terminology widely used to define how a corporation is addressing Environmental (E), Social (S), and Governance (G) aspects. The objective behind it, is to set standards to ensure well informed investors can choose to invest in companies that have good ESG characteristics or in other words can invest with purpose. It is interesting to know that it is not a new concept. It first appeared in several research works initiated by the United Nations 15 years ago. The objective of these studies was to highlight that drivers other than financial were – at least – of equal importance when investing in a company. These drivers, such as how a company addresses environmental issues, how it protects its human capital, how it maintains a corporate culture were all mentioned.
Is there a difference between US and Europe in regard to the commitment to ESG?
Today, the Environment aspect is the central element in Europe, whereas it is the Social aspect in the US. This is quite representative of the different society and political challenges faced on the two sides of the Atlantic. The reality in Europe is that climate change is a huge topic, especially after the Paris conference. It is embraced by politicians and many economic leaders following broad influence by voters and new generations. It took probably a decade to reach a wide adoption of ESG by the financial community as there was a misconception that companies who care about ESG, tend to underperform. The history of the last 10 years shows us this is not true. We saw that the fundamental drivers behind a good integrated ESG also contributed to generate market out-performance.
You have a special way to screen companies on ESG criteria – could you explain briefly?
Fundamentally and in its origin, a good ESG investment will assume that the three elements are well addressed when making a decision. Unfortunately, today, the investments tend to address only one or maybe two of the three elements. Our view is that the three aspects should be addressed in an integrated fashion. In this context, the key among the three ESG elements is the G. When a company is well governed, the board will undoubtedly address a good G, a good E and a good S collectively. Recent academic researchers have demonstrated this by proving that well governed companies have better E and S policies.
How can the “G” be measured?
The methodology we have chosen is one based on natural language processing. It is widely accepted in the linguistic and psychology sciences, that the character of an individual can be defined by the language he is using.
For example, someone saying ‘I’ in every sentence will tend to be ego-centric, while someone using ‘We’ will tend to be more a team-player. To extract the quality of governance, we use the same principle by using a proprietary dictionary of 7’000 words, capturing the G but also the E and S dimensions. These words are positive or negative. We study the appearance of these words in the annual reports of companies and based on how frequently they appear, we can statistically extract the quality of the ESG policy of a company. As the board is responsible for the annual reports, this means that we capture the “tone from the top”. In other words, we can pose a diagnostic on its quality of Governance and how it influences the integration of an ESG policy.
At the end of the day performance matters for an investor. How do ESG products perform compared to their benchmark?
I totally agree. We have seen over the last years that ESG indices have outperformed traditional indices. Some investors stress the fact that the absence of oil & gas companies is explaining this, which is partly true, but it only represents a small contribution. We believe the key is the fact that the majority of companies with true and honest ESG culture are more resilient and agile. Therefore, they tend to outperform their peers on a regular basis. In 2020, this phenomenon has been amplified showing that, in a period of major crisis, a good ESG culture helps to better weather the storm.
How is the demand for ESG-screened products developing and which investors are interested?
There is a massive shift of assets to ESG products, which is good news. It is forcing all companies to comply with E, S and G. This year we saw net-positive flows to ESG funds, while we saw net-negative flows to non-ESG funds.
Many reasons explain this movement. Firstly, many governments have set in place rules to force institutional investors to invest in ESG products and countries like France, Sweden and The Netherlands are leading the charge. Also, many banks are responding to the demand of the new generations – the millennials – who adhere to the need for a change including a change in the way to invest. The trend has been embraced and now there is a need to respond to this demand with more product solutions.
How long do you think it takes companies to adapt to ESG?
The transition will most likely experience an acceleration in the next months and years, but a lot remains to be done. Depending on the countries, it will take a few years to a few decades. The recent outperformance of ESG products vs non ESG products is definitely a trigger to this acceleration. To continue this trend, there are three elements that are essential: first, a good education process to ensure everyone from investors to decision-makers understand how to implement a good ESG culture; second, adoption of industry standards, ensuring that all ESG products respond to ESG rules; third, support the development of a new fully-dedicated ESG industry. In other words, there is a need for more ESG products, more ESG consultants, more ESG product managers to respond to the transition.
ESG ist jetzt im Trend. Was passiert, wenn sich die Unternehmen schnell umstellen und ESG plötzlich alltäglich wird?
It would be perfect! It means we would have done our job. Our objective is to force companies to do well. The reality is different as the vast majority of companies, investors and politicians have not sincerely embraced the concept.
Our belief is that the change will start with board members of all companies being engaged.
In your views, what are the three major challenges faced today to have the financial industry transition fully to ESG?
The ESG industry is still new and still considered as niche by many investors. We are at a turning point as some of the largest institutional investors and ultra-high net worth individuals have started to fully implement ESG. In this context, it will be essential to have a financial industry developing good ESG products, consultants ensuring these products respond to ESG standards, and an integration of the three ESG elements with a clear market outperformance objective.
Photos Copyrights: © Green Blue Invest Portrait Dr. Botteron, Shutterstock