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What a morning we had yesterday. I was part of the Mallowstreet University Roundtable discussing ESG and more particularly Quantifying Sustainability and making sense of ESG data. All trustees need to consider ESG, as do their scheme advisers and sponsors, so discussions like this are a very good place to start.
But first, a small historical aside. Many years ago, I met with the head of Renewable Energy Business Development for the Welsh Government. We were considering how to build a series of high-level dams in remote parts of Britain, where the integrated forces of nature could be used to power our homes and businesses.
On paper the theory was simple. The Western Seaboard of Britain has the largest tidal range in the Western World. It also has the strongest tidal vectors, the highest average wind, and the highest rainfall for miles around. All these factors can be used to generate electricity, but the rainfall piece needs a bit of explaining.
The highest and most extreme topography in the UK can be found within an average of 20 miles of its West Coast (hence the rainfall). Within this topography there exists a lot of land that sits over 2,000ft above sea level. This land is home to long steep valleys with narrow openings that could be used to build dams to capture rainfall and harness the aforementioned forces of nature to pump it up to high level. Here it could be used to generate hydroelectric power. This is a huge infrastructure project, and it would require capital from investors seeking long-dated, asset-backed, index linked cashflows (anyone have any thoughts here?).
Whilst that afternoon was more thought experiment than business development case (the graphics suite we used was mind-blowingly good, incidentally) the concept was nevertheless there. My erstwhile colleague, however, told me it would never work thanks to the lobbying power of several special interest groups, most notably The Ramblers. This set me thinking, if the scheme could get past their objections, would it pass an ESG sniff test. But I digress (as per usual).
We were hosted this morning by Quoniam Asset Management, who had a very interesting topic to discuss with us. The intellectual firepower around the table was impressive on paper but was evidenced amply by the engaging Q&A session held throughout the talk.
Quoniam began with a background to ESG and how ESG criteria for investment purposes had grown from 40% to 89% in the Mercer European Asset Allocation Survey. We are all looking at it now, but Quoniam showed us why it is now so popular. 85% of respondents in the survey noted that they had to look at it because of Regulatory requirements, 51% because it helped them meet financial goals. 40% considered it on Reputation grounds, 30% on Corporate responsibility grounds and only 25% due to the influence of Trustees. This seems low, but I suspect a lot of trustee engagement is caught up in Regulatory, CSR or Reputational when it is introduced by scheme advisers.
We then looked at the various dimensions of ratings and metrics, seeing which were quantitative and which were qualitative. Next, we were taken through ESG ratings vs. metrics, which prompted a flurry of engagement from around the table as people wanted to find out who did what, with which, and to whom. More seriously, though, this part of the discussion brought it home how different criteria are used to drive different answers from the same data set, so caveat emptor to one and al.
After this Quoniam took us through Socially Responsible Investing and how Sustainability goals could be used to do good instead of merely excluding bad. We looked at 17 laudable goals based on some thoughts led by the UN. The whole issue of goals and ambitions is a bit of a personal subject so I won't dwell on it too much here, but I would be delighted to hear your thoughts if you would like to share them.
Then we looked at two industries (Meat production and hydroelectric power generation) to see how radically different industries with certain similar characteristics were given radically different ESG ratings. One of the criteria was water usage - who would have thought Hydro was such a big consumer? This might sound flippant, but it is a very serious point. Your outcomes might be dependent on how you assess certain key criteria and if there is an absence of critical thinking then it could be time to expect the unexpected.
An interesting side discussion developed in respect of dams. Dams can be bad because they flood valleys and might displace indigenous peoples (Ben Nevis, Yorkshire and the Three Gorges spring to mind here). Then again, they can be good because they provide work for thousands of people and can actually prevent flooding and habitat destruction (think of the Hoover Dam). The key is what criteria you set and how you assess your investments against these. Think back to the UN criteria I mentioned two paragraphs ago and things get a little clearer.
Quoniam ended their discussion with an overview of how data (and there is a lot of it with up to 390 variables) can be used to help score managers and investments. The dashboard they showed us was an excellent example of this, where ESG Ratings, CO2 footprints, UN SDG were combined to create an ESG compound rating in an easily digestible visual format.
But back to the integrated power supply dam project. Would it pass the ESG sniff test? I don't know, but at least now I know there is a decent set of tools to properly assess the scheme in all its failings.
I hope Quoniam can be persuaded to re-run this session, it was invaluable for my thinking and I trust it was as useful for my fellow guests.