Responsible investment solutions

ESG is not enough. Investors must work together to protect the planet, says Regnan

Protecting the integrity of natural systems require policy intervention – and investors should advocate for a more holistic and inclusive regulatory approach.

That’s the view of Regnan’s Oshadee Siyaguna who has developed a new framework which explores why conservation efforts have historically failed to achieve their goals – and what the investment community can do about it.

The framework is outlined in a report called Beyond Biodiversity which can be downloaded here.

“Advocacy has to be top of the list for investors,” says Osh, a thematic Investing analyst with sustainable investing leader Regnan.

“Essentially, that means investors standing up and saying policy has not been adequate.

“It’s very clear that it needs to be policy led because as soon as policy changes, everything else will start to fall in line.”

ESG: Regnan launches investor guide to managing biodiversity risks

Most investors are now aware of climate change risks.

But biodiversity loss is fast emerging as the next big concern for investors, as financial institutions grapple with how to measure and manage the ecological systems underpinning economic stability.

“Land degradation has reduced the productivity of nearly one-quarter of the global land surface, impacted the wellbeing of about 3.2 billion people and cost about 10% of annual global GDP in lost ecosystem services,” the UN reported in 2019.

Sustainable leader Regnan has just released an investor guide, Beyond Biodiversity, which outlines a set of guiding principles for effective stewardship of biodiversity, nature and ecosystems.

“We want a stable natural system, a stable social system and a stable economic system,” says report author Oshadee Siyaguna.

“The fewer disruptions there are to business operations and socioeconomic conditions, the better and more predictable the investment outcomes.

Reverse-vending machine maker TOMRA aims to convert trash to cash

Every year, humans use 1.4 trillion beverage containers – a huge amount of material that potentially could be collected, reused and recycled.

It’s also an opportunity for “impact investors” looking for a way to make money and make the world better, believes Maxine Wille, an analyst with sustainable investing leader Regnan.

Regnan’s Global Equity Impact Solutions fund is an investor in Oslo-listed TOMRA, which makes “reverse vending machines” – those big metal kiosks that swallow your empty bottles and cans in exchange for a deposit refund.

TOMRA’s technology can identify a bottle or can by its shape, material and barcode, sort it into the right recycling queue and provide a payout.

“Now TOMRA has pioneered a machine which collects over 100 bottles in one go,” says Maxine. “You throw them in, and the machine sorts them.”

Last month TOMRA Cleanaway – a joint venture between TOMRA and waste management business Cleanaway and – won a deal to install its machines in parts of Victoria under a new recycling scheme.

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

ESG investing: how to understand, measure and mitigate

Underperformance in some sustainable strategies may leave investors hesitant about ESG from time to time.

But research from Pendal’s multi-asset team suggests ESG investment risks can be quantified and mitigated – and in the long run, a sustainable approach is likely to outperform.

“Investing sustainably is the right choice in the long term,” argues Michael Blayney, who leads Pendal’s multi-asset team.

“But investors need to understand how much and for how long their performance could differ from unscreened portfolios – and be comfortable with that,” he says.

Pendal quantifies the level of risk inherent to ESG portfolios by comparing the tracking error of representative ESG indexes with unscreened indexes over eight years.

Tracking error is a measure of how closely a managed fund tracks its benchmark index.

The data suggests ESG funds deliver “something like half the risk you would get from an active manager, simply from negative screening”.

Michael Blayney: How to take a multi-asset approach to sustainable investing

Pendal profile: Meet our head of credit and sustainable strategies George Bishay

Services – particularly wages and rental inflation – have held up prices recently. But Pendal’s forward indicators show the drivers of these two factors weakening.

That means inflation in developed markets should continue to fall and central banks globally can start cutting rates, says Pendal’s head of credit George Bishay.

It’s a bullish scenario for bonds as well as credit and equity markets, he says.

But one of the risks for that scenario is a Donald Trump victory in November.

“If Trump wins the election, will he have the ability to change policy? Will he have a majority in both houses of Congress?

“If he does, that’s problematic for bonds because ultimately that’s likely to be inflationary,” says George.

The impact of a Trump presidency is more skewed towards longer-term bonds because his policies would likely have a medium-term impact on inflation, George says.

“The short end should continue to perform because central banks will be easing rates as current inflation comes down.”