Our approach to Sustainable Investing is entirely consistent with our fiduciary responsibility to meet our Long-Term Return Objective
Why sustainability matters: a world in transition
Sustainable investing is not about philanthropy or giving up returns. The value of investments is influenced by many global drivers, including technology, natural resources and the environment, geopolitics, the inter-dependencies of globalization, and demographics. We need to rethink how externalities impact systemic risks and their long term financial implications. As investors, we strive to avoid risks that may compromise long-term economic value. Considering externalities is essential to ensure the long-term viability of our investments. “The survival of firms depends as much as we do on the maintenance not only of physical and financial capital but also of natural, human, and social capital” (Colin Mayer, Prosperity: Better business makes the greater good, 2018).
Traditional management and investment thinking has been very linear. “Markets do look efficient under certain circumstances, namely, when investors have had a chance to adapt to existing business conditions, and those conditions remain relatively stable over a long period” (Andrew Lo, Adaptive Markets, 2017). A world in transition is not particularly stable, and the fact that integrating ESG considerations systematically in active portfolio management is not yet mainstream presents an opportunity. Asset managers require new technology and alternative data to make better-informed investment decisions and to better evaluate the risk-return characteristics of actively managed portfolios. The challenge lies in the practical implementation of this approach. It requires leadership, a culture of innovation, and perhaps most importantly, effective engagement with all stakeholders.
Our journey on the path of Sustainable Investing
We began our journey towards Sustainable Investing by restricting investments in tobacco and armaments decades ago, reflecting the values of the United Nations. OIM became a founding signatory to the PRI (Principles for Responsible Investment) in 2006. This was followed by investing in the first Green bonds in 2008 issued by the World Bank, and being the catalyst investor in Low Carbon Exchange Traded Funds in 2014. In recent years, OIM has been transitioning from a program of ESG related activities to embarking on a process of integrating ESG considerations across all asset classes. OIM believes that portfolios which integrate material ESG metrics into their investment decision-making process, supported by active engagement, have the potential to provide returns that are superior to those of conventional portfolios while exhibiting lower risk over the long term. This view is supported by several published academic studies and our own research. We see evidence that ESG considerations are beginning to enter the mainstream investment world. Rating agencies are implementing ESG factors that could impact the credit rating of corporate issuers. Fitch stated recently that ESG Relevance Scores reveal that ESG factors influence 22% of its current non-financial corporate issuers. ISS reports an increasing number of ESG related items on the proxy voting agendas of corporates.
The objective of our Sustainable Investing approach is to integrate ESG considerations in our investment decision-making process across all asset classes
OIM began introducing ESG metrics into the existing investment process, by giving portfolio managers a broader set of tools to consider in their investment decisions. For internal actively managed public equity portfolios, we are piloting a process tailored around PRI’s recommendations. In 2018, OIM implemented a new custom global equity index which can serve as a benchmark for other global equity investors. This index takes into account investment restrictions on companies which exceed a defined threshold of revenue generated from Tobacco or Weapons. Within Fixed Income, we have been increasing our portfolio of Green bonds in line with net outstanding issuance in this market segment. For private markets, OIM integrates a comprehensive analysis of ESG issues into the due diligence process. We are exploring GRESB as an ESG benchmark for core real estate.
Technology and the availability of alternative data sets enables greater integration of ESG considerations in investment decisions
Integration of ESG considerations requires new tools and alternative datasets that are not conventionally used for supporting investment decision-making. OIM is leveraging its partnerships with key data providers to construct an internal proprietary ESG database, which will help distill material ESG data by separating the noise from the signal and provide the investment teams with more robust screening capabilities. We believe that combining financial and alternative metrics may increase the odds of improving the risk-return profile of our portfolio over the long run, compared to the conventional investment approach.
Our Sustainable Investing approach is beginning to incorporate forward looking methodologies in evaluating the impact of climate change on our investment portfolio
Investors need new tools that integrate energy economics, alternative climate scenarios, and traditional financial data to evaluate return and risk exposures related to climate change and new sources of energy. These tools could help investors evaluate the climate change transition risk as well as achieve greater climate sustainability in their investment portfolios. OIM recently signed a strategic partnership with a leading provider of predictive climate analytics. Our efforts to signal our commitment to a low carbon strategy through passive investment in low carbon Exchange Traded Funds in 2014 was just the first step in addressing the impact of climate change. With this partnership, we are now planning to move to an active strategy by using a highly sophisticated climate and energy simulation model to assess companies’ ability to adapt to various carbon emission scenarios. This “E” score will be used as an input factor in developing our proprietary ESG investment-decision supporting technology, risk management, and reporting.
UN Sustainable Development Goals (SDG)
OIM is conducting research on developing quantifiable SDG scores by utilizing artificial intelligence (AI) to leverage big data and systematically measure companies’ impact on the SDGs. This research will aim to provide empirical evidence hopefully addressing the widespread perception that there is a trade-off between financial returns and incorporating ESG or SDG considerations in investment decisions. It will strengthen our understanding of the interdependencies between a firm’s long-term economic value and its societal impact. OIM looks forward to publishing a more detailed white paper on this topic, which will hopefully serve as a catalyst for a broader discussion among long-term institutional investors.
Engagement through encouragement
The last pillar of our Sustainable Investing approach is engagement. An active sustainable voting policy combined with engagement can result in more effective and durable change consistent with the UN’s values. OIM believes in a collaborative and constructive dialogue with company management to achieve mutually beneficial outcomes. The Fund is a signatory of the Climate Action 100+ initiative and is in the process of building up its engagement activities in collaboration with other long-term institutional investors.