Part One: ESG Strategies

Responsible/ethical/green investing is a broad subject and with growing demand in recent years, more formal strategies and metrics have been implemented by investment firms.

This week we’ll define ESG funds use and a recent case study detailing the actual impact of an Irish ESG fund. Part two will discuss performance and pending regulation.

Types of investing often bundled with ESG investing:

Impact Investing: Investing in a specific cause, such as water or solar power.

Ethical Investing: Excluding companies that are involved in certain sectors, such as fossil fuels, ammunition or have business models that do not align with your personal ethics.

ESG Investing: An acronym for Environmental, Social & Governance considerations. Well, what does that mean?

Fund managers invest in companies based on each companies’ policies with regard to how they impact the environment, society & how the company is run. You can then invest your pension or savings into these ESG funds made up of companies that are operating responsbily.

Environmental considerations are measured in a broad capacity and can even allow for an energy company that is moving away from fossil fuels and committing to sustainable practices. (see case study below)

Social considerations are equally broad ranging from human rights, fair wages, child labour to health & safety.

Governance considerations examine executive compensation, board independence, business ethics & board diversity.

The sum of these considerations gives a company an ESG ‘score’. Unfortunately, each fund manager or life company can use their own rating scale and it is hard to measure one fund against another. Next week’s blog will touch on the pending regulation that aims to help measure ESG funds uniformly.

Some ESG funds are quite passive and simply select companies the fund managers have deemed to fit their ESG model. Other fund managers take a more active approach, working with companies and holding them to account with their ESG commitments. Below is a case study of an Irish ESG fund taking an active approach and how investors can make a tangible impact. I came across this case study on a call with fund managers from Aviva (researching their ESG strategy) and found it worth sharing -this case study is not sponsored by Aviva in any way and is simply a great example of what can be done.

Aviva & BP Case Study:

Aviva’s work with BP

• Aviva Investors multi-year engagement with BP culminated in a shareholder vote on a new climate strategy at their 2019 AGM which achieving 99% approval.

• Newly-appointed CEO Bernard Looney announced an ambitious plan to hit net zero carbon emissions by 2050. If successful, this change to their business model will wipe out the equivalent annual carbon footprint of the UK and Ireland combined (Source: Aviva Investors).

What’s the update?

• Since the announcement Aviva investors have continued to meet BP regularly to monitor and help them execute on their climate plan.

• BP recently published a detailed roadmap with shorter term milestones to hit by 2025 and 2030 on capital allocations and carbon reductions;

  • They will sell off £25bn of high carbon projects by 2025

  • Oil and Gas production will decline by 40% by 2030

  • They will increase renewable investment 10 fold by 2030

Source (BP sustainability Report 2020)

Any clear evidence of them executing on the plan?

• Early signs are showing a meaningful commitment;

  • In June 2020 they disposed of their petrochemical business for $5bn and in Feb 2021 they disposed of almost a $3bn stake a gas business (Source: Bloomberg).

  • They partnered with Equinor on a $1bn offshore windfarm spend in the US in late 2020 and in Feb 2021 announced an investment of almost $1.5bn for the development of two windfarm projects in the Irish Sea (about 30km off the coast of Wales) (Source: Bloomberg).

What next?

• Aviva investors will continue to work with and monitor BPs progress in executing on their ambitious plan.

• Aviva investors are now working closely with the top world’s 30 largest carbon emitters to drive them towards similar change.

Fortunately for investors, ESG funds have performed well to date. Part Two of our blog will discuss the performance & pending regulation arising from the growth of the ESG sector. As always, should you have any queries or feedback regarding the above, do not hesitate to contact me.

Author: Rachel O’ Shea, QFA, Senior Consultant

E: roshea@olearylife.ie

T: 0214521328