PineBridge Investments recently conducted its third annual ESG Forum, part of its commitment to educate employees and track progress and advancements relating to the key environmental, social, and governance (ESG) factors informing our investment processes. The forum launched in 2021 to showcase the various ways our investment teams consider ESG-related risks and opportunities, seeking to enhance our investment teams’ processes and analysis of ESG factors into investment decisions.
The two-day forum consisted of sessions featuring both in-house and external experts, with topics including insights from a leading asset manager on their firm’s ESG journey and evolution; views on energy, sustainability, and the global transition from a prominent investment research and strategic advisory firm; and an exploration of ESG alpha opportunities with PineBridge portfolio managers across regions and asset classes.
Across the sessions, key themes consistently came up in conversation, which we highlight in this summary.
Whether it’s the impact of the energy transition on oil and gas revenues, the role that other industrial or tech companies will have in decarbonizing value chains, or the potential for “ESG improvers” to see increased investor support that leads to lower cost of capital and better valuations, we believe ESG considerations are a core component of a forward-looking approach to fundamental due diligence – and of our ability to deliver on our clients’ long-term risk and return objectives. Looking ahead, the participants expressed their expectation that ESG would continue to play an even greater role within risk and return objectives.
That sentiment was echoed by Chris Perryman, PineBridge’s Co-Head of Global Emerging Markets Fixed Income and EM Corporate Portfolio Manager.
When ESG first started, it was very much defensive, because it was exclusionary – it was looking toward best-in-class,” Mr. Perryman said. “But we’re seeing a narrative change to impact and transition, and with those come alpha opportunities.”
The idea that an approach which values impact and transition over exclusion was shared by Frederic de Mariz, Head of Sustainable Banking at UBS Brazil.
If the philosophy of your [ESG product] is, ‘I will only take the best and cleanest,’ then first, you have a smaller pool to invest in, which is not good from a financial standpoint in terms of returns, but also, we are not going to solve the critical issues that we want to address, so this is not the best approach from the financial and ESG points of view. It’s really critical that the asset manager and the asset owners understand that having transition stories is really where you get the alpha; but also where you have a true impact, so you can really think about business with purpose.”
No transition will involve more investment and have more impact on our planet and global economy than the energy transition. James West, Senior Research Analyst covering sustainable technologies, clean energy, and oil at Evercore ISI, provided valuable insight on the long-term nature of energy transition.
Every energy transition we’ve gone through has never been a transition off of a fuel, it’s been increasing the energy mix,” Mr. West said. “So, I don’t see oil and gas declining, but I believe there will be a peak in oil and gas: oil demand probably within the next three decades, and gas is pretty clean itself, so perhaps we’re 50 years away. We will consume more energy as a society than less, and hopefully, oil becomes lower-carbon. Clean (energy) will come up and will rise, but clean energy companies are small-scaled, need capital, and need their own gas industry.”
This view of energy transition aligns with the approach taken by our Multi-Asset team, as detailed by Sean Jo, Multi-Asset Portfolio Manager.
One of the emerging themes our team has focused on is new energy and the global effort to decarbonize energy sources; we’ve constructed this ‘New Energy’ basket by screening for companies that have a focus on renewable energy,” Mr. Jo explained. “But some companies [within this basket] do participate in traditional fossil fuels. Renewable energies like wind, solar, and hydro are not yet 100% reliable, so to ensure energy stability, these new energy companies will burn some fossil fuels to compensate. Of course, we want to limit present-day emissions as much as possible, but our ESG process is focused on forward-looking improvement. We focus on whether a company is decreasing its carbon footprint and contributing positively to the [new energy] trend.”
The energy transition can also be seen in an investment theme currently embraced by our fundamental equity team, as Ken Ruskin, Director of Research and Head of Sustainable Investing for Global Equities, described.
We know we want to go to clean energy, but it will take time to get there, and the best thing we can do in the interim is actually reduce the emissions from the old energy sources. Recently, the market has begun to reward companies that reduce their customers’ emissions,” Mr. Ruskin commented. “Companies that are enabling energy efficiency outperformed traditional clean energy companies over the past year. So, the broadening out of ESG beyond just clean energy is one major theme that we’re embracing in our investment process.”
Ultimately, we believe ESG factors will eventually have a similar impact on financial returns as traditional credit and equity metrics and as such, believe ESG processes should be aligned with our fundamental investment approach.
As Jonathan DiMola, Portfolio Manager, Global Multi-Asset, explained:
What’s most important is that our progress is organic, meaning it needs to build on our existing investment philosophy and process. Our investment process is anchored by our forward-looking Capital Market Line, where we’re projecting out cash flows and capitalization rates. We’re taking a complementary, forward-looking approach with ESG. We’re looking for the catalysts for change and, from there, assessing how those risks and opportunities will impact cash flows and capitalization rates.”
The event featured insights from across the PineBridge investment platform, including fixed income, equities, multi-asset, and alternatives, and featured on-the-ground perspectives from colleagues based in the US, Europe, Hong Kong, Singapore, and Taiwan.
Across our investment platform lies a wide range of ESG data and disclosure, from large-cap, investment grade US and European corporations that offer investors a multitude of ESG data points, to privately held companies tapping private debt or equity markets that may be asked to consider ESG issues for the first time. Regardless of which end of the spectrum we are investing in, there are consistencies across the asset classes – e.g., the importance of materiality when performing ESG analysis and of a fundamental understanding of corporate management, along with the benefits of inclusion and engagement over exclusion – each of which tie into the belief that ESG analysis is a core component of our investment processes.
From his perspective as investment banker, Frederic de Mariz, Head of Sustainable Banking at UBS Brazil, discussed the challenges surrounding data complexity and the need for ample resources to synthesize and assess the information.
It has become so complex that you need to have a team dedicated to it, you need to have resources,” Mr. de Mariz said. “You are going to have a situation where maybe the smaller asset managers are relying on external data … to some extent everyone is using [third-party providers], but I find that the best in class are using that raw data and calculating their own ratings.”
At PineBridge we have 68 research analysts covering corporates around the globe, across all sectors, and throughout the capital structure, each of whom incorporates ESG analysis within their fundamental due diligence.
Claire Barbour, Research Analyst on PineBridge’s Developed Markets Investment Grade Credit team, discussed her role and approach to assessing environmental risk in a credit.
Our team takes a balanced approach. Most energy transition forecasts incorporate some level of oil and gas over the long term. We assess existing infrastructure and consider future advancements in energy transition, an example being investments in carbon capture or hydrogen [projects]. The goal is to ensure the long-term financial viability of the company.”
Ken Ruskin, PineBridge’s Director of Research and Head of Sustainable Investing for Global Equities, explained how the job of our analysts is to look beyond present data to anticipate change.
The data providers tend to be static and backward-looking. We think of our job as very similar to what we always do fundamentally: trying to forecast based on the available data and dialogue with the company, while reconciling that dialogue with our own beliefs. We want to look at change, and markets don’t care about what happened in the past, they care about what’s going to happen in the future.”
Mack Fuller, PineBridge Portfolio Manager and Head of Sustainable Investing for Private Credit, described the role lenders play in pushing for ESG disclosure among private borrowers.
We’d love to have a lot of data, but many of the companies to which we lend are first time recipients of institutional capital, and are thus new to such dialogue and requests,” Mr. Fuller said. “We make an effort to ask forward-looking questions that they may not be used to responding to, and it may cause them to think about issues that they might not have otherwise.”
Steve Hasnain, PineBridge Leveraged Finance Portfolio Manager, spoke about the similar role played by our Leveraged Finance team in engaging for increased disclosure and documentation of ESG risk.
We need standardization when it comes to reporting; otherwise you will encounter a situation where you are comparing apples to oranges,” Mr. Hasnain said. “Data reporting is improving. When we are looking at ESG outcomes, it’s really two to three years, it’s a longer timeframe, when it comes to ESG objectives and measurement, and our priority is to continue the dialogue with management. We think that will drive positive change.”
Whereas engagement within the private credit or leveraged loan markets may be a foundational step of ESG due diligence, our Indian Equities team has observed a notable ability to effectively engage for change, as Head of India Equities Huzaifa Husain explained.
We find companies are extremely receptive to our ESG suggestions,” Mr. Husain said. “We also follow a philosophy of having a dialogue rather than a debate. When we give sensible advice, it is appreciated. In India we are very fortunate; most of our companies are very receptive and very eager to meet us when we want to talk about ESG.”
PineBridge continues to believe that attention to ESG factors can both help avoid risks while uncovering opportunities. We remain committed to advancing our efforts to incorporate ESG factors to best serve our clients’ needs.
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