Seson 1 Episode 19 The world of ESG with Cathrine de Coninck-Lopez

Conversations on Climate – The world of ESG with Cathrine de Coninck-Lopez –Edited Transcript

In this episode of the Conversations on Climate podcast, we discover the world of ESG with Cathrine de Coninck-Lopez: We are thrilled to present the transcript for this enlightening episode featuring the remarkable Cathrine de Coninck-Lopez. In this thought-provoking conversation, we delve into critical climate issues, sustainable practices, and innovative solutions to shape a greener future. Join us as we explore Cathrine’s expertise and gain valuable insights into the pressing challenges and opportunities within the climate sphere.

This is a full but edited transcript for Cathrine de Coninck-Lopez

Section 1: What is ESG?


00:02:15 Chris: Cathrine, thank you so much for taking the time to come speak to us out of your extraordinarily busy schedule.

00:02:19 Cathrine: Thank you for having me.

00:02:20 Chris: Can we just dive right in? ESG is a subject that means a lot of things to a lot of people. And I know any explanation of what ESG is could take up the entire length of this podcast. But what does ESG mean to you? People do tend to narrowly define its in terms of carbon, but it obviously means an awful lot more.

00:02:44 Cathrine: There are I think two ways of describing it. One is the subject itself. So, the E. S. and G. Under the E pillar, you would have carbon emissions, you’d have water emissions, you’d have topics like biodiversity. Then on the Social pole, you’ll have issues like human rights, labour conditions, and even data privacy is increasingly coming into that Social pillar. Then on Governance, you have things like the structure of the board, its remuneration issues, audit concerns, etc. So that’s at a very high level how you broadly defined the topic areas. 

But then what has happened in the industry is that ESG has also been defined in terms of investment approaches. And so you have a whole spectrum of investment approaches: process integration versus ESG product. Those two are different things. Then within that, you have the functional areas as well. So the whole landscape becomes really complex as a result of these different issues.

00:03:49 Chris: And within each of those aspects you’re talking about, there’s different subsections and subsets as you go down: your managed funds, passive funds, all of them with ESG banners and everybody trying to stick an ESG label on what they’re trying to do. The world does get extremely complex, which is why it’s wonderful to get the chance to speak to you about this!

But before we get into the weeds on that, can you talk a little bit about yourself?

00:04:12 Cathrine: Sure.

Section 2: Cathrine’s Career from Science to Finance

00:04:12 Chris: So your background – you had got two degrees in science before you came to this field, and then you went directly into investment management. What brought you to ESG before it was cool?

00:04:30 Cathrine: I was always interested in linking sustainability and business, and so I studied sustainability because back when I started university around 20 years ago, there just there wasn’t the option to study the combined effort which there is now, which is fantastic. Now you have this growing pool of candidates that are actually able to study these interesting subjects together, but I wasn’t able to do that. So I went to the scientific route and always thought: I’ll do business later. Which is why after my two science degrees is my Executive MBA at London Business School. So I was brought from the science field into financial services from my master’s thesis in particular, which was in climate science, and the IFC doing an investment actually in Nepal, a hydropower plant.

I was looking at the sustainability of that kind of investment under different scenarios of climate change. That was my thesis. Because of that, I got interested in how the finance world actually has a really big role to play in these kind of sustainability themes, and actually making the world more sustainable. 

We had a guest lecturer come and talk during my Masters, and that person at the time, [from] Columbia Threadneedle, had an opening and so I went straight from my Masters into that. It was all very opportunistic. It was the only job I applied to and got it. That was how I ended in finance.

00:06:06 Chris: That’s wonderful. What kind of skills from the world of science do you find useful in your current day-to-day? 

00:06:15 Cathrine: Honestly, I use it every day. Not everybody can say that about their jobs today, but I do use my scientific background every day. even climate change modelling, back then as you say, wasn’t modern. Now it’s actually regulated – something all the financial services houses have to do.

Having had that background, and having that understanding is, I think, absolutely essential: to understand some of the pros and cons of some of the models we use; some of the challenges; some of the assumptions you have to make; and then some of the outcomes of that. And being able to challenge that is really important.

00:06:54 Chris: Yeah. So you are one of only two scientists we’ve interviewed so far, so it’s fantastic to get your take on it. The scientific method, in looking at problems, is quite different to methods that would come from other realms of academia, like economics or game theory or anything like that. How do you balance off your scientific training, and your training from the MBA? How do they complement each other in your own thought processes?

00:07:26 Cathrine: Well, ESG is exactly how those two skillsets have to come together, because actually the ESG role…regardless of your subject matter, if it’s in the E. S. or G., if you’re a specialist in the E. as I was, but then you link the business side – which is the product, the systems thinking, the stakeholder thinking, that you get from the MBA – when you link those two, those are the skillsets you need in an ESG role. Because you have to be a subject matter expert, but you have to understand as well the applications and the business context, and the sensitivities and the challenges and how you build business plans and so on. And obviously in a global esg role as I am now, that is that is essential actually.

Section 3: How the ESG Function Works @ Invesco

00:08:12 Chris: Which leads us very nicely to: what is your day-to-day as Head of Global of ESG for an enormous fund manager such as Invesco?

00:08:23 Cathrine: The day-to-day, luckily, is very varied. I don’t think I have a standard day. But I would say in terms of my team – and I get involved in all of the team activities actually, at some level of business strategy setting and interfacing internally with various stakeholders. But then we have four key areas that we focus on.

Firstly, clients – working with clients, meeting clients, talking to clients about what their needs are on the team is a really big part of my day-to-day. 

The second component is research and engagement. We engage with Invesco, not just in my team, but collectively with around 3000 companies a year. We meet with a lot of companies and a lot of stakeholders and talk about these issues with companies. I get involved in some of that as well. On the research side as well, we have our own research systems, ESG intel. So again I get involved with understanding that system, looking at new data sources, looking at new insights we can pull into that system – it covers about 15,000 securities. 

And then also we also have voting. So as an equity shareholder, you get to vote in an Annual General Meeting, and you get a vote even in an active or a passive strategy [of product]. We vote in around 9000 securities a year, which is a lot of companies where you actually say, yes, I will approve this term and yes, I will approve this set of audit accounts or yes, I will approve this climate change resolution. So I oversee that process, and we in the ESG team set the global proxy policy in partnership with our national teams. 

And then the final component I spend my day-to-day on is data and analytics. So in the ESG world, you’re constantly looking at new data sets and new ways of analysing companies. Because actually, that’s what you’re doing in an ESG role: your analysing companies, but not just from its P&L or its cash flows or its balance sheet; you’re analysing using its stakeholder management, its environmental emissions, or the way it governs itself. To do that, you need new data sources. Right now we have over 50 different data sources that we use each day.

So my day-to-day is very varied. It’s very broad, and all of that is in the global context as well, in Asia, Europe, and the US.

00:10:44:17 Chris: Well, that’s mind blowing. Where do you start with all of that? Like I said, there’s so many areas, so many ways you could be digging into any of that. The first thing that comes to mind is asking, when you’re advising companies and talking about the analytics, how does your role differ with the role of a more traditional fund manager? Do you go in and talk together with the fund manager? What about if there’s a conflict between, fund managers saying, ‘oh, sure, you should just chop down that forest, it’d be great’? 

00:11:25:11 Cathrine: So the role of the ESG team is to advise, to provide tools, to provide insights, to provide analytics and data. But the fund manager makes a decision. The fund manager has, you know, the full fiduciary interest of the client at heart. We in the team provide that insight and those tools. So in your example, if a company has an issue around forest management or sustainability of its supply chain, for example, we would highlight that and say these are the types of challenges that may come with it from a financial perspective. So it could be: if you have a lack of supply chain sustainability, can you actually deliver your product line? Is your product going to be more expensive? Is there a wider corporate sustainability issue as a result? And that’s the kind of advice and dialogue we would have with a fund manager or analyst, but they would make the final decision on where they choose to actually invest or not.

00:12:23:21 Chris: Is that the same with voting as well? The fund manager makes that decision but you advise? 

Cathrine: Precisely. 

Section 4: Surviving Recession and Getting Subjective

00:12:30 Chris: Perfect, I understand. That clears up a lot for me, so we can dig into that a little bit later on. 

Looking back a little bit, ESG and the whole ESG fund management space has exploded over recent years. It’s been a huge success story. But 2022 was really hard across the board, and 2023 isn’t looking like it’s going to be much better. Assuming we are going into recession and things are getting tighter, my first question is: how do you see ESG performs in difficult markets, and do you see a risk that companies, as they feel under more pressure, might just take this: marketing budget, cut that; ESG, you can cut that too. Or has it been brought into the DNA of businesses over recent years?

00:13:25:00 Cathrine: I think there is definitely a difference between a company’s strategy and its responsibility to its bottom line, but also stakeholders and its employees and the environment in which it operates and how a company manages that through a recession, and then there is the fund industry and how a fund would do, and how and the ESG construct in which it operates…that will be impacted by the rules that are being set. Those are two slightly different things. 

I think a company that is well-managed, including looking at ESG issues, should do better in a recession because they are looking at these things from a long-term perspective. They are likely to be less volatile, they’re likely to have had an eye to the future, to have had an eye to those kind of resilience questions. I think those kinds of companies should do better from a broad, and good quality, management perspective. 

Now, in a fund construct, you are subject to a very broad range of options. And as we were alluding to earlier, there’s the process of integration where you’re really looking for ESG issues, but you may choose to buy a company that perhaps, you know, had challenges. But if the price is low and those challenges are incorporated in the price, and you think that the company is working on those challenges then that might be the best investment for me, if your client really only has financial return as its objective.

Where you’re then moving to other options where you have screens – my clients don’t want to invest in tobacco or they don’t want to invest in thermal coal, for example – You’re then bound by those kinds of exclusions. Even the tobacco company that is perhaps managing its way forward in its regulated world and developing solutions, etc., you can’t invest in them regardless. In a fund construct, you are bound by those kinds of restrictions. So that’s good. 

Then you move into, I would say, stronger ESG-focused options like responsible funds or sustainable funds or even impact funds. And there you are likely to see even tighter restrictions and controls. And they could be about carbon optimization. They could be about saying, I only want to invest in companies that score really highly on all ESG metrics, the best-in-class companies. You move into different variations on your earlier point. There are thousands and thousands of different types of products out there, different constructs of those variations. And so performance, how you will do in those 2022 and 2023 environments, really depends on where you fall on that spectrum, and where you are thinking about ESG and what matters to you as a client. 

What I will say generally is that in a recessionary environment, the kind of broad themes that investors tend to seek out are quality, low volatility, and income. In particular, the quality and the low volatility points are really strongly correlated with an ESG-type ones. The better, bigger companies that are more able to manage their ESG footprint, they are likely to be lower volatility. They’re likely to have an income stream. So that would be where you would be looking towards, I think, in more of a ‘safety’ environment. 

And that is what we’ve seen in 2022; the sort of very exclusionary, focused, very thematic – say renewables – just haven’t done that well. If you were really restricted in a very thematic environment, and in an environment where you’re looking for safety, those kinds of higher-risk assets won’t do that well. But I think in a broader allocation perspective, as a client, as an individual investor, you would just want to understand those trade-offs and look to the longer term. You’re not investing for one year; you’re not investing for two years. You’re typically investing with a 10- or 20-year horizon. And I think that as long as you have a mix of options in a portfolio construct, you can weather the storm.

00:17:56 Chris: Very well put. It also really brings out the theme that it’s really hard for an investor. It’s a very broad world and there are there are thousands of options out there; options of varying quality. There have been people who’ve just been trying (because it’s been so successful) to stick ESG badges on things that really shouldn’t have them.  As an investor, what should I look for if I want to put my money into a fund?

00:18:36 Cathrine: I think it starts with: what are your investment values? What are your values full stop? What do you actually care about?

00:18:44 Chris: I know what I care about. I know what I want to support. But I know that in the world out there, there are some people who are more genuine about ESG than others. I have a certain level of knowledge in this stuff, but a lot of people who would be looking at it wouldn’t. So they wouldn’t be making the judgments on whether being underweight in an oil major is actually an ESG play or not. A lot of ESG funds do have oil majors in there, but it’s just less than in the market so therefore it’s ESG compliant. But that, to me, is not. But I understand that, and I can make that decision myself-

00:19:31 Cathrine: -And I go back to exactly your point. As an individual, you will have a different view of what ESG is, and what your values are. So someone else may say, well, I think it’s okay to invest in oil and gas, but I just generally want them to treat their employees right. I want companies to treat their employees right. That’s what I care about. So it’s really important, I think, that whoever is investing is clear about what they actually want to try and invest in. That’s the first point. Because unless that’s clear, then the options may or may not match. Because in that construct of screen; responsible; sustainable; or impact, there will be different constructs even within that.

There may be some that completely exclude fossil fuels, but there may be some that don’t. So you as an individual need to be clearer about what you actually believe credible is, and what meets your values. That is really important, and I think that’s what’s been missed in all of this is actually: that ‘ESG’ label may be appropriate because there is an ESG construct, but it may not meet the values of what you think is ESG, or a pressure group think is ESG. And therefore, funds have been called out for greenwashing. But if they’re doing what it says they’re doing but it just doesn’t match your values, and then that’s more about a mismatch of option with investor values, as opposed to it not doing what it says on the tin. Do you see? 

I think that has been one of the key issues in the market and that’s been I think one of the big issues that regulators have had as well. That’s why transparency is super important. It’s very important that individual investors can see, ‘it excludes these three things. Oh, but it still includes oil and gas. All right, then. It’s not for me.’ That’s what’s super important here, is transparency.

00:21:39 Chris: Okay. And that also brings us onto another theme. Everybody looks at ESG through certain lenses, but those particular lenses will vary by your own cultural background, by your own geography, by way of where you come from, and what you believe. What we believe in London, would be quite different from what you believe in Dubai, would be different in New York and Hong Kong. But as a global investment fund, you’re trying to have complete ESG policies that are for the globe. How on earth do you manage that? 

00:22:17 Cathrine: What we do is we’re really investment-led on the financial material integration. We provide advice. We do have a global ESG standard, but it’s in the context of what we believe is financial material. So the ESG rating is with that link-to-the-bottom-line lens on it. That’s what our investment teams use, and that’s what we call ESG process integration. 

Then on top of that, we’re client-led. So we produced, in different regions, different options for different clients that have different needs. So in Europe, we have probably our biggest ESG product suite, and I’d say most global firms are like that because the European client base is more interested than in other areas.

So what we find is that as long as that core investment process thinks about ESG from a sustainable value creation perspective, then we can optimize and provide clients solutions on top of that address all those different values and needs. I think that has been really quite successful in terms of making that kind of balanced approach globally. Because you’re right, it’s not the same. It’s not the same, what people want in Europe or what they want in Asia or what they want in the US. And I think we need to be sensitive to that and deliver what our clients want.

Section 5: ESG Beyond Carbon

00:23:38 Chris: Okay, perfect. And getting back to kind of the more personal stuff again, I was really interested to see you speaking on the Financial Times panel on nature-positive investment. What does nature-positive investment mean to you?

00:23:56 Cathrine: Well, nature-positive as a concept was actually coined by the World Business Council for Sustainable Development as a topic. It’s similar to net-zero from a climate perspective, but nature-positive means that you would have positive nature results by 2030, and you would actually have no net destruction by 2050. That is what it means.

Now, what is interesting is that concept didn’t actually make it into COP15, and it didn’t because it was quite targeted, quite short timelines with 2030. While COP15, which is the big biodiversity conference that happened in Montreal in December, was really successful-

00:24:45 Chris: -Otherwise known as the successful COP of last year!

00:24:47 Cathrine: Exactly. I think it was successful in that it was it was setting out some broad vision, some broad goals to 2050, which were around financing, around protecting the ecosystem, and I think importantly halting destruction of ecosystems which is probably the single biggest issue we have to face right now. But then it also set some more specific targets to 2030.

So in some ways the nature-positive concept was reflected, but it wasn’t specifically called out as a topic. So that’s an area for debate. Maybe it’ll come later. But what was very positive about where we are on biodiversity is that one, it has become a mainstream issue… one of the 2030 targets were actually around disclosure and reporting, and it called out financial institutions explicitly. This is now something that not just the EU regulator has called out, but the world governments have called out as a topic for the business world to be reporting on and thinking about. And you measure you manage what you measure.

00:26:07 Chris: That’s it, that’s great. From an investor management point of view, you sound like you’re confident that the almost totalitarian obsession with one molecule, that is carbon, will be lessened and biodiversity will be another element added to that. I don’t think it’s particularly healthy that we’ve just been focusing in on carbon. We’ve been so obsessed with carbon. Carbon is really important, of course, but there’s other important things as well, like biodiversity. So it sounds like you’re feeling positive that biodiversity might become a more integrated part of that whole conversation.

00:26:49 Cathrine: I would agree. I think even COP15 called out climate as well, and COP27 called out biodiversity. So they are becoming more and more linked. Where we can find solutions, like in carbon capture, that also are net-positive for biodiversity outcomes, that would be fantastic. And you are seeing more and more of those kinds of solutions.

Yes, I think they are linked. But I also agree that biodiversity definitely is one of the emerging topics that everyone’s paying much closer attention to.

00:27:29 Chris: What are the other topics? With ESG, it’s very broad. But if biodiversity is one of them, what else are you finding is coming out?

00:27:38 Cathrine: The big topic is human rights. It is a big topic. It is a topic, to your point, that is not universally agreed upon, and what we are trying to do right now – and what we’ve actually done just in our research framework, in our proprietary rating system – we have included some new data to start scoring companies on human rights.

But even just on social issues more broadly, the World Benchmarking Alliance has scored around 1000 global companies on a 20-point framework, and the average score on social disclosure and management was five. So we have a very long way to go in terms of where we are on the social topic; both from a disclosure standpoint, but also actually from a management standpoint in companies globally.

00:28:31 Chris: Yeah. I guess it’s easy, or relatively easier to be calculating a carbon footprint. That’s binary. As long as you can see where your carbon is being emitted from, you can count it. It’s much more in the eye of the beholder, these more human rights-type issues. So how do you assess, how do you manage, how do you put a number on – a rating on – somebody’s position in relation to a less scientifically tangible [outcome]?

00:29:02 Cathrine: We use third parties, and so we brought in a new score: the children rights benchmark. We haven’t done it for every sector because we have a materiality-led approach, and so for certain sectors we believe these issues are more material than others. But we brought it in, and they score around 3000 companies globally. They score them around policies and management; it’s the lens of children rights, but it’s really broader – it’s really human rights issues. So we’ve brought that in as a topic into our rating system, as one data, really as a flag. It’s really just to say, is this something we need to dig into here, if they get a really poor score? That’s our starting point.

It’s really just starting to try and find the data sources from unique places, because it’s not a readily available topic that we can just take from a third party, one of your big third-party providers. It’s really more of a niche topic. We’re trying to find those kind of data sets that we can bring into our system, and then we’re using that more as a flag and a topic for discussion. I think it’s a little too immature to have really hard lines on it right now, because it’s still a very evolving topic for companies and investors to think about.

00:30:33:22 Chris: Interesting. I look back at my time in banking, and what you’d normally do is each team would have a lawyer, have an accountant, have someone who’s an investment analyst, someone who thinks that way… let’s say, with the US equities team I’m sure there would be a lawyer and accountant, but would there be someone who’s an ESG specialist on the team as well? Or would they look to you as an external resource? Or is there an internal person who then also talks to you? How does that work?

00:31:14 Cathrine: So that varies actually from team to team. In Invesco we have all asset classes. We’ve got passive, active, fixed income, real estate, private markets; we’ve really got all the asset classes. So investment integration varies between those different asset classes. Also, some of them have more product ranges in terms of ESG, so some of our teams will have ESG experts sitting within them, and some of them won’t. But regardless of whether they do or not, the global team really serves as a partner. We’re part of the global investment function, so we are very close partner to all the investment teams globally. 

What we do expect from our investors is to consider ESG. I think the global ESG team as a function to help people help themselves. So it’s a lot of training. We’re a team of deep experts; my team has over 13 years average experience on ESG – deep expertise in the issue, certificates and backgrounds similar to myself, in climate or social issues. We are really the experts, but we expect, and we’re trying to train and provide expertise, to get everyone up off the learning curve on this topic.

00:32:40 Chris: Okay. And has the team grown? I’m sure it must have grown massively since you turned up, over the last four or five years.

00:32:48 Cathrine: Absolutely. We are now a team of 31 people and it has grown substantially. It’s more than doubled in size in the last three years.

Section 6: Opportunity, Risk, and Transparency in Global ESG

00:32:59 Chris: Okay. Focusing in on the global part of what it your job title: where do you see the most exciting opportunities for ESG investments in the world? Outside of the developed world – Europe’s massively overweight and being both overanalysed and whatever else – what do you see as the most exciting opportunities?

00:33:21 Cathrine: Gosh, there’s so many! I think the biggest thing – and I do want to get this in, because I think it’s so exciting for me as an ESG professional that’s been in the space, like you say, before I was before as fashionable – I think it’s that first they ignore you, then they fight you, and then you win. And I think we’re winning! I genuinely believe we’re winning. So I am so excited about how ESG is just becoming part of the standard way of operating. That’s what I’m most excited about actually, that systemic change. 

But in terms of the specific product areas, impact investing and where you are putting a very tangible, very additional flow of capital and measurable flow the capital is something I think people need challenging around. Right now, that is it’s a very niche part of the market. It is largely private markets. And I think you are seeing more interest in how you really make that even more tangible in say, fixed income. That is probably the area where you have newer structures – bonds where you can ringfence assets in a different way to equities.

But then there are new types, like blockchain that allows you to break down an equity. Those types of innovations, if you can link those kind of new financial structures with impact, that is super exciting. It will probably take many years still, but it’s definitely something that is being looked at. That would be where I think there are some really exciting areas for development and innovation.

00:35:12 Chris: Going back to one of the original themes that you talked about: a part of your global role is engagement. But again, you’ve got the issue of cultural differences and how you have different companies, in different parts of the world that might be more and more or less receptive.

00:35:39 Cathrine: I think so. My role I think is yes, to promote ESG, but it’s probably more to serve our client needs, who are interested and have a growing interest in ESG. And then from an investment process perspective, again, linking it to a fiduciary perspective and seeing actually this is part of fiduciary responsibility because the companies we invest in are being impacted by these changes.

Employees are having greater demands on these type of social equity issues. The environment is changing. Look at the physical risk from climate change, biodiversity, etc. having an increasing impact on supply chains, integrity of products, etc. And the governance of companies obviously is a topic that has for a very long time been recognized as something that will impact bottom line.

So I think that’s my main role is to look at companies from that perspective and help educate on that. I do think in a landscape where you do have divergent opinions on the role of companies, just in that environment, I would always bring it back to: it’s good for business and that is what investors are focused on too. It’s sustainable value creation.

00:37:03 Chris: ESG unfortunately, particularly in recent days, has become a bit of a political football. You’ve had Texas taking some pretty dramatic action against a couple of your peers, BlackRock, Credit Suisse and others, because of their environmental stances, and banning them from Texas state investments. How do you deal with political risk from ESG?

00:37:30 Cathrine: I go back to that same issue – we are investment-led and client-led. So we are looking at what our investment teams think are important to their investment process. Now, financially material ESG issues are important to the investment process. That’s the investment team belief. Obviously, for the different investment teams, it may manifest itself slightly differently, and that’s important. That it really is up to the investment teams to incorporate as they see fit for their client base, and for their fiduciary duty and maximizing their objectives, which for the most part is financial return. 

Our role is to serve the clients, and it is a broad range of clients. We may have clients that really care about issues. We may have clients that don’t. Honestly, that’s fine, I think that’s the nature of the world. That’s how we’re tackling this political issue, is really to say politics stays with the politicians. We’re focusing on what our investors want and what our clients want.

00:38:39 Chris: Do you see a role for yourself in potentially educating clients in ESG, particularly in areas where there might be an associated kind of political risk of going one track rather than the other?

00:38:54 Cathrine: I think we do have a role to be transparent about what ESG is. I think there’s a lot of confusion, as we have highlighted right from the beginning. And so, yes, I do think we are trying to be more transparent about what ESG is and what it isn’t. So for example, in our Global Stewardship Report, which we produced every year, we actually put that right up front: how do we define ESG? What are the steps we are taking? How do how do the different categories work? We very transparent about that, and that’s been that’s been a very useful tool. It’s a public document, it’s on our website, and it’s a useful tool for discussion with clients, but also stakeholders for sure.

Section 7: Voting and divestment– coping with contradiction

00:39:38 Chris: I see in the ESG investment world in general, things that that’s appear to be conflicts. Where a particular fund management firm would, in one set of circumstances, vote one way and in a very similar set of circumstances, votes in the opposite. I’m thinking along the lines of kind of Paris commitments, where an oil major might have one set of investors saying, yes, you should be signing the Paris Agreement; and then the same firm, on the other side of the coin, looking at a different firm, a different oil major, would vote the opposite way. How does that happen? Is it just because kind of the individual fund manager takes their own views? So you your peers across the industry would advise and say, ESG suggests you should do this; but ultimately, it’s down to them and what they think is appropriate?

00:40:43 Cathrine: We have a global proxy voting policy, and so there are different approaches to it. In terms of the industry approach, there isn’t actually one industry approach to proxy voting. It does differ between the different firms. But what is generally in place is a proxy voting policy. In general, across the industry, firms would have a public document that would say: this is the proxy voting policy. This are generally our principles of how we vote. In terms of how that then gets applied, it does differ a little bit. So at INVESCO, we do allow different fund managers to vote differently depending on their beliefs and how they feel that fits with their strategy. Other firms’ wont; they will vote one way. So those are two different ways of ways of thinking about it. 

I will say there is a big movement in the market to allow clients, pension funds and so on…actually in the UK there’s something called ‘expression of wish’ where there’s a discussion about should an individual, should a pension fund have more say in how they actually vote on their fund? You have seen more industry players moving towards that kind of optionality around having different votes. Which has always been our approach, in that we have allowed different funds to make different voting decisions based on what their needs are within the global policy construct. So we do have a global policy – general guidelines – but an individual fund manager makes the decision.

Why that happens in a specific issue like a Paris Agreement-type shareholder resolution, why you would vote in favour on one company and against in another company, tends to be rather than fund specific, company specific. Probably these resolutions will be analysed by an analyst, and they will say: well, this company has already addressed this, already has a strategy, already has targets. We don’t need to support that [resolution]. But another company may not, and therefore, you would be supporting that [resolution]. So it really is quite company specific as to why you vote a certain way, even though the actual resolution in and of itself looks the same.

00:43:16 Chris: Okay. That’s very clear, thank you. One of the trickier subjects across the whole ESG fund management industry, for a decade really, has been the whole idea of divestment. Is it the right thing to do to take all of your capital out of fossil fuel companies, and therefore hardening up an investor base of people who are dedicated to fossil fuels and have the company, and so [divestors] having no voice to be able to talk – or not? You can see the argument on both sides. You can see the argument to say: it’s actually true. I think we don’t want to be supporting these companies with our capital, so we’ll move it out. You can see the argument that we need to be talking to them and try to get them to decarbonize. How do you see that dilemma?

00:44:16 Cathrine: I think you need both. I do think you need to have some hard lines, particular if your values as a client are, I just don’t want to invest in that sector and I don’t want to invest in those types of activities. That’s a very clear-cut situation.

I think where it becomes a little less clear is where your entire objective is financial performance. Then I think it’s very difficult to say, I’m going to exclude a whole sector, or I’m going to exclude a whole industry. Then surely you’re better off engaging and having a conversation and saying: I need to invest in the market; the market includes this sector; how can I actually improve, and how can I be helpful, to that conversation? All in an investment context of the fiduciary duty to maximize returns for the client.

Section 8: Passive ESG – a Contradiction Too Far?

00:45:24 Chris: The other megatrend in the investment industry aside from ESG has been passive investment. It’s always been something that’s been slightly puzzling to me because ESG is, aside from carbon as we discussed before, in the eye of the beholder. There has to be some sort of question about what is ESG and what isn’t. Personally, I’ve struggled with the idea of a passive ESG fund just as a concept. How can you passively have something where you need to be making decisions about what fits and what doesn’t? A passive FTSE tracker – easy. I know what’s in the footsie. But what’s an ESG investment and what isn’t, passively? Could you help me with that? It’s something I just never will be able to get my head around. 

00:46:14 Cathrine: So if we start with: what is passive investing? Because that’s passive versus active. In passive you’re following an index, and the way an ESG index works is you set rules. Those rules will be based off different types of data, and they’ll be based off different types of ESG philosophy. So an ESG ETF is basically running off different rules. That’s basically what it does. 

So I think it’s entirely possible to do that because you can have, to your point, measurable bits, things like carbon. You can measure carbon in a company, its carbon footprint, and you can say this index is only going to be made up of companies that have certain carbon footprints, or do better than their peers in that carbon footprint. That is a measurable thing. You can create an index and you can create a solution that follows those kinds of companies, and then you’re investing per definition in those kinds of companies. 

What you’re not doing though, and that’s the active bit, is you’re not making decisions actively. Like, this company has maybe a slightly higher carbon footprint, but it’s improving. That wouldn’t that would not be allowed in the passive [product]. You have rules and you follow rules; in an active [product] you’re more flexible. You can actually understand what a company is doing and you can go with them on a journey, all of those kinds of things. Also, I think in a passive you are much more subject to good data. In a passive construct, it is more difficult to get to some of those items that we mentioned earlier, those softer elements that probably are more of a conversation with the company. So those are the two differences I think with passive ESG and active ESG. But I think it’s entirely possible to have an ESG ETF, and actually it’s the preferred vehicle for many because it does take a little bit of the subjectivity out. You know the rules; it follows rules; and you get the rules. Whereas in an active construct it is more subjective. But in an active construct, you have more optionality as well. You can say well, actually this company hasn’t done what it was supposed to do. I’m just not going to invest in it at all. Whereas in a passive construct you have to invest in the whole index. You can’t take something out until the index rebalances. 

00:48:55 Chris: Okay, so as long as you narrowly define it to items that are reported on regularly with some sort of consistency in some sort of general understanding – like carbon, for instance – then it’s possible. But it becomes much more difficult if you’re trying to do it on other aspects of the S and the G particularly.

00:49:22 Cathrine: I would say so. I think it’s really important for people to understand what they are investing in. I’m coming back to the earlier conversation because in an ESG ETF, many ESG ETFs run off ESG ratings. So they’re not specific to a carbon issue; it’s an amalgamation of those ESG topics that we talked about earlier, and then it comes up with a rating and says, you are A-rated on ESG, or B rated on ESG, and that means you are following whatever that rating provider has decided is important within ESG. So I think it’s important for people who are investing in ETFs to understand that rating system, because actually in the ESG world, one rating system can be 50% different to another rating. There is zero correlation. So you could get really very different outcomes based on what rating system you’re running your rules off. 

00:50:26 Chris: Wow. So that’s a new world for me. It’s like the Moody’s and Standard and Poor’s for ESG. Is it those same companies?

00:50:35 Cathrine: There loads and loads of providers out there. Moody’s do have a rating. Standard and Poor’s have a rating. MSCI have a rating. There’s Sustainalytics. ISS have a rating.  There are lots and lots of rating providers out there.

00:50:54 Chris: But in a debt type of world they tend to be…

00:50:59 Cathrine: …they’re very highly correlated in that world. In the ESG world there is zero correlation, pretty much zero. And that’s why that’s a key challenge, because that means exactly that. You are not comparing apples with apples if you have a different ESG rating system.

00:51:17 Chris: Yeah. To talk in particular about INVESCO, you have plans to incorporate ESG into all your processes by 2023. That’s just brilliant. And that’s really soon! How’s that going?

00:51:32 Cathrine: It’s going very well, actually. We have set that target on the process integration. So again, coming back to how we define ESG, you have to think about ESG process integration and that is the way the investment teams are thinking about their investment process. And that’s what the target pertains to, when we talk about ESG integration and the 100%. We have a system where we analyse our investment teams, my team does that. We look at our teams and we see where they are on the journey. The target is 100%; we’re very close. We’re happy.

Section 9: Conclusion and Top Tips

00:52:10 Chris: Last question then. Investment is crystal ball gazing stuff. You’re trying to get a good sense of the future and trying to make your make your decisions based on what you feel the future will hold. If I were making investments today with an ESG hat on, what advice would you give me –what things do I need to look for, for the sustainable, and the sensible, investment of tomorrow?

00:52:53 Cathrine: I would say the first thing is make your money matter. Think about what you care about, and whether the disclosures on whatever product you’re looking at matches those values. I would be really critical about what you’re investing in. That would be my biggest piece of advice.

00:53:16: Chris Great. Well, thank you again so much for your time, it has been a great conversation. I really enjoyed this and learned an awful lot, so thank you. 

00:53:26 Cathrine: Thank you very much. I appreciate it.  


Watch the full interview with Cathrine de Coninck-Lopez on the Conversations on Climate Podcast page.

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