Fund managers looking for sustainable investments can find themselves with incomplete non-financial data needed to make their decisions. At BLI - Banque de Luxembourg Investments, Annick Drui, manager of the 75 million euro BL Sustainable Horizon fund, explains how she is trying to strike the right balance.
Regulations such as the Sustainable Finance Disclosure Regulation, or SFDR, require fund managers to report on their sustainable and taxonomy-aligned investments while companies in whose shares they invest are not yet expected to share the necessary data. Data vendors, accustomed to making risk-based assessments, only partially fill the void.
“Reporting timelines are just not perfectly aligned. Everyone’s trying to understand what regulations will entail without necessarily having all the data available,” said Drui in an interview with Investment Officer Luxembourg.
“In an ideal world, it should have been the other way around. First companies report, and only then are set the rules and definitions for the financial industry. However, the urgency to act and guide investments towards sustainable activities is pressing, thus we see this lag.”
‘Swimming in the dark’
The current regulatory environment for sustainable investments is one full of predicaments because of poor timing in the rollout between requirements for funds and requirements for listed companies. “The financial industry has to start reporting before companies report on their own data. We’re swimming a bit in the dark,” said Drui.
“Obviously, you don’t want to make statements today about how you’re going to approach it, and then have to change them in the future once that data becomes available,” she said.
At the BL Sustainable Horizon fund, Drui introduced a concept based on a dual approach with two different pockets. One contains more traditional ESG investments, and the second looks for impact values contributing specifically to the realisation of the UN Sustainable Development Goals.
Two pockets
“The split into those two pockets should harmoniously work together. So we have this ESG optimization on one hand, which looks to invest more into large cap companies. And then on the other hand, we have the more truly impact focused investments,” she explained. “Having both is really complimentary from a financial and non financial aspect.”
The BL Sustainable Horizon fund has increased its impact investments by a factor five over the last two years, Drui said, and now holds about 25 percent in SRI assets, 70 percent in ESG, and five percent in cash. The fund is part of a total of 16.5 billion euro in assets under management overseen by BLI’s managing director Guy Wagner.
The fund mainly targets what it sees as ‘best-in-class’ corporates with a high degree of awareness of their role in the value chain. At the end of February held a portfolio with consumer product groups like Unilever, Kimberly-Clark and Colgate-Palmolive, health and pharma group Novo Nordisk, technology firm Microsoft and industrial gas firm Air Liquide, among others.
Wanted: Enablers
“Oftentimes, these are what we call enablers. So that means, for example, in the industrial sector we see companies such as Air Liquide, as an enabler of the transition and technological progress. Indeed, the company helps its clients to manage energy and other resources better, by upgrading infrastructure and promoting the adoption of clean technologies and industrial processes to reduce climate change,” said Drui.
“We also hold multiple healthcare companies, because these enable access to health care. Several technology companies are included as well, which are more about decision making and how information platforms will allow decision makers within companies to make decisions with an ESG lens. It’s really about this whole enabling effect of these companies throughout the value chain.”
CSDR will push non-financial reporting
Multinationals such as those in Drui’s fund are widely recognised as global sustainability leaders and are already accustomed to reporting non-financial data on their value chain impact even when regulation does not yet require them to do so. More and more companies will be forced to do so in the coming years as new rules are introduced for non-financial reporting, also due to the upcoming EU Corporate Sustainability Reporting Directive, or CSDR, that was proposed in 2021.
“What we can say is that data is definitely getting more available, and that companies have understood that in terms of business continuity, this is something they need to provide, and need to be aware of if you want to remain competitive,” Drui said.
She noted that, when it comes to non-financial reporting, Europe still leads, with the United States coming in second. It took a while for corporates to get used to fund managers asking for non-financial information. But even in emerging markets, it is slowly becoming more common.
‘Huge pool of investors’
“So, at first they were like, ‘we’re getting bombarded with all these questions, and we’re not sure where they’re coming from’. Whereas now they’ve understood, okay: so, there’s a huge pool of investors who have these additional regulatory requirements that they have to comply with,” said Drui.
Still, in the absence of a comprehensive requirement for corporates such as the CSDR, reliable data sometimes is hard to find, complicating investment decisions. Data vendors such as MSCI and Bloomberg try to fill the gap
“We’re really dependent on what companies provide. Data ultimately defines an investment process, and investment processes are based on using data,” said Drui. “What’s important is for everyone to really understand, where’s this data coming from? And then also be very transparent for us as asset managers on how we use this data.”
Drui pointed out that data vendors, in applying their own analysis to non-financial data, also tend to introduce a bias on their information. Their historic approach to analysing financial data, such as for instance for corporate bonds, has given them a risk-based bias. As a result, a value-based assessment, assessing impact and ESG performance, can be overshadowed.
Risk-based vs performance/value
“They take this raw data from the companies and they create scores, based on their specific rating methodology, just as it has evolved in the bond markets for a long time. It’s important to understand that they can have either risk based approach, so where they’re very focused on risk exposure, and how companies manage ESG risks. Or they can be more performance/value focused, where it’s more about really just ESG performance and positive contribution.”
“It’s important to understand that oftentimes, in our experience, it is still very much a risk-based approach which is favoured by these providers. This can lead to favourable assessments of large cap companies that might intuitively not be seen as sustainable and yet explains their inclusion in many sustainable funds. It is precisely a result of how the data is compiled and then used.”
Good data is biggest challenge
The biggest challenge for a manager of a sustainability fund is to find good data in regard to the impact or positive contribution of companies. ”Really, this positive contribution part is still an issue in terms of data on how we define ESG performance and measure impact for companies. A starting point for the fund is the contribution companies make in the realisation of the SDGs. It would be good for that to become more of the norm, to avoid greenwashing and sustainability washing claims.”
“Currently, because good and universally accepted data is still missing, everyone is naturally spinning a story around impact performance. Obviously, not with the aim to greenwash yet in order to fill the data gap and get the investment message across, shortcuts are sometimes unavoidable. Once again highlighting the importance of transparent reporting, sought after by the regulations as well.”
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