The Amundi European Equities ESG Improvers Fund differs from other ESG funds in the sense that it does not necessarily invest in ‘expensive’ ESG leaders. ‘We try to identify the ESG leaders of tomorrow that have only relatively recently started to make progress on ESG’, says lead portfolio manager Suzanne Keane.
‘There is often a time lag between when companies start to make improvements in their ESG policies and when this is reflected in their ESG scores and valuations,› Keane says. This, she says, explains the outperformance potential of so-called ESG improvers. ‘We certainly have some ESG winners in our portfolio too. But the majority of our positions will always be ESG improvers. We see most potential in this category, both in terms of valuations and improvement potential on ESG.’
ESG momentum
Amundi, by the way, is not the first asset manager to concentrate on ESG improvers. Back in 2016, research by Maastricht University commissioned by NN IP already showed that a portfolio of companies with rapidly improving ESG scores outperforms the market. If the selection is, on the other hand, solely based on ESG scores, there is no outperformance.
All well, but how do you identify such ESG improvers? First, of course, you need to know how companies are doing on ESG and whether they show demonstrable improvements in their policies. Amundi, like other investment houses, uses ESG scores and reports from external parties such as Sustainalytics and MSCI for this.
‘But using data from just one or two providers for this purpose is completely inadequate,› says Keane. ‘The ESG scores of the various providers differ enormously.’ Amundi therefore uses data from no fewer than 11 different providers.
Look at the future
But ESG scores alone are not enough to identify the ESG improvers, according to the Irishwoman. ‘You must also look at the future plans of these companies and ask yourself whether they are taking sufficient action to continue on their ESG improvement journey. Just showing a historical trend based on ESG scores is not enough.’
Keane says: ‹I look in particular at where companies are going to get their future growth from, and whether they are moving in the right direction.’ In this way, fossil fuel companies such as Shell also end up in the portfolio. ‹I agree that it is controversial to include such companies in an ESG fund though.’ The Amundi European Equities ESG Improvers Fund is classified as ‹Article 8› under the new SFDR regulation.
But a company that is currently very polluting but is working hard to make its business model more sustainable fits well with the fund’s philosophy, Keane says. ‘In energy companies we therefore look at how they are expanding their activities in areas such as offshore wind, biofuels and hydrogen. Another important question is what oil companies, most of whose income now comes from selling petrol and diesel, are doing with electric mobility. Will they install charging stations for electric cars at their petrol stations, for example?’
Shell or Total?
Although a company like Shell still invests relatively little in green energy, according to Keane it makes good steps in this area, as is witnessed by 5.07% allocation to the firm at the end of February. Keane is not invested in France’s Total, although this company also has an ambitious sustainability policy. The reason why the fund invests in Shell but not in Total remains unclear, however. Keane declines to discuss individual companies.
Banks and healthcare are problematic
The heavy underweight in a sector that is generally very popular with ESG investors, healthcare, also draws attention: only about 7% of the fund’s assets are invested in the asset class, just half the allocation of the fund’s benchmark, the MSCI Europe Index. Keane explains the underweight by pointing to the relatively large number of ‹controversies› in the sector, combined with the fact that healthcare stocks are quite expensive, partly due to the pandemic.
For Keane, banks are also difficult to invest in. ‘Money laundering scandals and other governance problems have had a huge impact on the sector. It is difficult to find banks that have not been affected by this in some way.’ Norway’s DNB is one of few banks that do meet Keane’s governance requirements. It is also the second-largest position in the fund (at the end of February). ‘Within the financial sector, we also look at stock market operators, for example›, says Keane. There are four of these in Europe: Euronext, LSE, Deutsche Börse and Switzerland’s SIX.
Despite the short life of the fund, which was launched in June last year and now has around €50 million in assets under management, Keane has already parted ways with one company that turned out not to be as much of an ESG improver as was thought. ‘The company in question was active in the luxury sector and was not making fast enough progress in cleaning up its supply chain. We think it is very important for such companies that they only buy raw materials from certified suppliers and that employees in the supply chain are treated well. That company did not do enough to achieve this.’
But Keane does not sell companies just for ESG reasons. ‘The fund’s strategy is a combination of ESG and fundamental analysis. For example, we have taken profits on some quality companies in our portfolio because of inflated valuations, and we have added some value names.› It’s because of the latter point that eyewear manufacturer Essilor Luxottica recently became the largest position in the fund. ‹This is typically a company that can benefit from an end to lockdowns.›