Walking the talk to net zero

gladstein-barry

Barry Gladstein

  • Head of Sustainable Investing – Public Investments
  • Read bio

As climate action gains momentum across the globe since the 2015 Paris Agreement, the investment world has begun acting in kind. We at Macquarie have put our own important stake in the ground as the first large asset manager to commit to managing our private investments in line with global net zero emissions by 2040 – ten years ahead of the Paris Agreement. We also have put this commitment to paper, signing The Climate Pledge and joining more than 100 signatories who share the same 2040 ambitions.

As Macquarie Asset Management head Ben Way put it, “Sustainability is at the heart of our business. It is the right thing to do.”

How green are the assets?

This comes amid a groundswell of sustainable and environmental, social, and governance (ESG) oriented assets. According to Morningstar data, $51 billion flowed into sustainable US investments in 2020 alone (source: Morningstar). With this rise, there is also increased focus on just how green these assets are. One development has been that the US Securities and Exchange Commission (SEC) and UK regulators have begun looking into whether sustainability labeling on some investments and products may be misleading.

The UK government, for example, is looking to set up a system to support investors, consumers, and businesses making green financial decisions and to oversee a “Green Taxonomy,” a framework that sets a bar for investments to be defined as environmentally sustainable. The Green Taxonomy is expected to help clamp down on greenwashing – unsubstantiated or exaggerated claims that an investment is environmentally friendly – and make it easier for investors to understand how a firm is impacting the environment. (Source: Reuters.)

We recognize that potential mislabeling is a legitimate concern for many investors and market participants. It’s why we are dedicated to a full commitment to sustainability, and to transparency around that. We just don’t talk about it – we walk the talk. Permeating our entire business, our commitment reflects efforts to align as much as possible with sustainability, including adhering to responsible investing principles, and setting up definitive processes and practices.

Global sustainable investing assets have grown to US$35.3 trillion since 2016

Source: Global Sustainable Investment Review 2020. *Australasia and Europe have enacted significant changes in the way sustainable investment is defined, resulting in complicated direct comparisons between regions.

Assessing companies’ sustainability efforts

As one part of our effort in striving toward sustainability, we have been focused on reflecting and aligning as much as possible with broader frameworks and agendas for action, such as the United Nations’ Sustainable Development Goals1 (SDGs). This collection of global goals, centered around issues such as climate, energy, and transport, is designed as a “blueprint” to a more sustainable future.

Using the SDGs as a guide, we recently introduced a process to evaluate individual companies’ contributions to sustainability goals and to recognize those genuine efforts in addressing environmental and social concerns. In this framework, we constructed a database of over 125 different data points to assess each company’s SDG alignment. The intent was to capture different ways a company can positively influence society, such as through:

  • Commonly used tools for assessing public company impact – the revenue associated with the products that a company makes and services they provide.
  • Other less widely used sources include membership and participation in public-private partnerships, recognition from third-party assessors of corporate behavior, and commitments to upholding individual sustainability standards.
  • Also incorporated are third-party sources that evaluate a company’s negative actions, to provide a well-rounded picture of the net results of a company’s actions and intent.

After additional evaluation, the result has been an internal scoring system providing a quantitative measure of a company’s alignment with the UN’s sustainability goals. This scoring system is intended to help investment teams create portfolios with companies viewed as aligned with the SDGs. The scoring methodology is meant to identify those companies that either place above a certain threshold or fall well short of that threshold, with the requirement of additional qualitative assessments for companies that fall between those two criteria. The process is expected to continue to evolve going forward as new data points are evaluated, as well as ensuring that the current process remains effective.

Sustainability resonating

While it is important to provide transparency about our efforts and approaches, our commitment to sustainability goes much further. This commitment is fundamental across Macquarie.

Ben Way, in calling out efforts in meeting our commitments, noted a range of actions on issues related to climate change and sustainability more broadly. He further stated that he believes “we have the potential to make a significant difference and deliver positive impact.”

Practicing good governance in ESG monitoring

--Lotte Beck, Global Equity Team

Monitoring the companies invested in, including assessing the corporate governance practices of an investment, can be a key component in reducing investment risks. ESG-related incidents can reveal gaps in a company’s management systems and vulnerabilities in corporate strategy – all of which are relevant to company analysis and assessment.

Incidents such as allegations of greenwashing against some investment firms can trigger direct financial effects. The increasing attention on ESG culminated in March 2021 with the establishment of the EU Sustainable Finance Disclosure regulation. One of the goals of this regulation is to combat greenwashing and increase transparency.

How we monitor

As active shareholders, we view monitoring companies that we are invested in as an essential part of our ESG framework. By using news, company documents and reports, research, market developments, and regulatory sources, we strive to monitor developments and circumstances that could influence the potential return of the investment. In addition, we may incorporate qualitative third-party ESG research to evaluate the potential of an investment, determine risks and opportunities, and monitor the companies invested in.

In collaboration with Macquarie Asset Management’s Sustainable Investing teams, the Global Equity team works to ensure compliance with good governance requirements specified as part of the Sustainable Finance Disclosure Regulation (SFDR2). If poor governance practices are identified in the monitoring process, we may pursue remediation that could include direct engagement, proxy voting, or, as a last resort, divestment. Direct engagement can provide additional insights into the quality of management of governance matters and is included in the overall company assessment.


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1 For more information on UN Sustainability Development Goals, go to https://sdgs.un.org/goals.

2 As of 10 March 2021, investment managers are obliged to report according to the sustainable finance disclosure regulation of the EU. This includes the manner in which sustainability risks are integrated into their investment decisions and the results of the assessment of the likely impacts of sustainability risks on the returns of products they make available.

The views expressed represent the investment team’s assessment of the market environment as of November 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Diversification may not protect against market risk.