ESG (Environmental, Social and Governance) issues and long run performance

Funds Management

by Carolyn Herbert

Candriam Investors Group, Global Head of Responsible Investments and Research, Professor Wim Van Hyfte, discusses the Candriam Sustainable Global Equity Fund, its approach and the importance of ESG in stock selection.

Carolyn Herbert:
Hello. I'm Carolyn Herbert, and joining me from Candriam Investors Group to discuss the Candriam Sustainable Global Equity Fund is Professor Wim Van Hyfte. Wim, welcome.

Wim Van Hyfte: Thank you.

Carolyn Herbert: Wim, can you start by explaining the difference between ethical, socially responsible and sustainable investing?

Wim Van Hyfte: Well, it actually all started with ethical investing many years ago -- I would say nearly 20 years ago -- and then gradually evolved over time by integrating more and more aspects of sustainable and responsible investing into the investment process. If you're talking about social investing, well, then, you're really talking about one important aspect of the whole framework. Sustainable and responsible investing is really about integrating environmental, social and governance issues into the investment decision framework.

Carolyn Herbert: So, what are Candriam's credentials regarding sustainable investing?

Wim Van Hyfte: Well, Candriam has a very long track record in the ESG space. Actually, first of all, the name "Candriam" is an acronym and stands for "Conviction and responsibility in asset management", and we're actually celebrating our 20th anniversary in terms of ESRI involvement. So, we started, actually, in '96. Secondly, we have a dedicated ESG team, which has a long track record in doing ESG assessments on companies. And, if you look at our performance for the Global Sustainable fund, we have done very, very well over the last 10 years.

Carolyn Herbert: So, Wim, what is the fund's aim?

Wim Van Hyfte: Well, the aim is to outperform the benchmark in a consistent way over a rolling 3-5 years period by actually implementing a very diversified, risk-controlled and disciplined framework. In that framework, we integrate tangible and intangible drivers of alpha. We do this by picking the best stocks within each sector based on our ESG and our financial framework.

Carolyn Herbert: And, Wim, how do you rate the companies you research?

Wim Van Hyfte: Well, like I said, it's a kind of a best-in-class framework. So, what we do is we look at all the E (environmental), S (social) and G (governance) attributes of a company, and then we look at which companies score best on that whole set of ESG factors. And you end up with a list of companies that are eligible from a sustainable and responsible investment perspective.

Carolyn Herbert: So, Wim, what kind of activities are viewed as controversial and are screened out in full?

Wim Van Hyfte: Well, controversial activities are open to a lot of debate, obviously, and there's always a personal perspective to it, but Candriam has made a clear choice to classify a few activities as really being controversial. To name a few: tobacco involvement, adult content, alcohol, genetic modification. So, these are a few examples of what we consider to be controversial. Once they are controversial, they will be screened out of our portfolio.

Carolyn Herbert: And what about companies involved in fossil fuels? How are they treated?

Wim Van Hyfte: Well, it's kind of different. It's part of our best-in-class evaluation framework, where one of the factors we look at is climate change; and obviously if operational activities of companies have a high carbon footprint or are really involved in fossil fuels, that will screen negative in our best-in-class classification.

Carolyn Herbert: So, how do you help improve corporate social responsibility?

Wim Van Hyfte: Well, Candriam's ESG and analysis team has a lot of experience, and we learn a lot from our proprietary research, and we take that research and try to educate and help companies to improve their business operations -- where possible (for some it isn't, so these are obviously going to be screened out). But there are a lot of companies who are doing a great job in trying to improve their process, their business activities, from an environmental, social and governance perspective, and that's where we try to engage with them to help them on their journey.

Carolyn Herbert: So, how would you characterise the overall bias in your portfolio once the Candriam process is applied?

Wim Van Hyfte: A bias is a substantial deviation from the reference benchmark -- which, for this fund, is the MSCI World. This fund doesn't really have a bias. First of all, it is, from a portfolio perspective, sector- and regional-neutral -- so, we select the best companies within each sector within each region. And, on top of that we integrate not only tangible financial information, but also intangible, hidden information -- the ESG part -- into the portfolio process. So, from that regard, it makes us a better-informed investor, with no biases in terms of styles, financial information or ESG parts.

Carolyn Herbert: That's been great, Wim. So, any points you'd like to make in conclusion?

Wim Van Hyfte: Well, like I said before, Candriam is really convinced that a sustainable strategy which focuses on environmental, social and governance issues makes sense in the long run -- not only from a risk perspective, but also from a value perspective. And that's what we're trying to do in this fund -- integrating that intangible, hidden part -- ESG -- into the portfolio, and combining that with a very sound, structured and disciplined financial process.

Carolyn Herbert: Wim Van Hyfte, thank you very much for your time.

Wim Van Hyfte: My pleasure.

Carolyn Herbert: And, for more information on the fund, please visit ausbil.com.au, or search "Candriam Sustainable Global Equity Fund".

Ends