In this interview, Reyer Kooy, at DWS, the global investment manager based in Germany, sees environment, social and governance (ESG) themes becoming a strategic focus for corporate treasuries as they rise up investors’ agendas. While firms move to understand how ESG considerations should be incorporated into financial operations we can sure that treasurers are set to play an important part as ESG values come into the mainstream and investors set out their expectations of the corporate world.
How is ESG affecting investment management?
Covid-19 has led companies to think about their role in society and their goals in a very different way. They are thinking much more broadly about stakeholders and how their businesses handle ESG issues. Regulations are part of this trend too. The CFO (chief financial officer) and corporate treasurer naturally want to maximise their contribution to ESG priorities by investing responsibly. Hence the interest in the ESG footprint of money market funds (MMFs). Treasurers want to understand the ESG profile of the assets that make up such funds – how they look through an ESG lens.
This means that investment management firms like ours are deploying sophisticated ESG engines to score the underlying securities we are buying on behalf of our mutual funds and investors. We are able to provide transparency on that on a line-by-line basis, showing the ESG score on individual securities, but also at the headline level, showing the overall ESG score of their MMF.
Can you expand on what you mean by sophisticated ESG engines?
We get our information from a range of independent data providers on ESG credentials, which allows us to score individual securities. That scoring then dictates the extent to which we can invest in that security for different types of portfolio. DWS acquired a stake in an ESG data supplier called Arabesque AI to further expand our capability.
There’s a lot of debate about the value of ratings and scores, which can vary widely. How do you get the best “read” on ESG scoring?
We do that by diversifying the inputs. On a given security we will get multiple scorings, but it’s not about just cutting and pasting someone else’s score, it’s about taking a diverse range of scores and then interpreting them to create our own. We are very careful to ensure that only portfolios and funds that are fully compliant with our ESG scoring engine are labelled as ESG.
How are treasurers approaching ESG when it comes to money market funds (MMFs)?
There are not that many MMFs out there. But increasing numbers of treasurers find ESG to be important to their investment criteria. What we’ve found within MMFs is that there is a small compromise in performance for full ESG MMF strategies. It’s important to note that in MMFs the predominant driver of investments is capital preservation, then liquidity, then yield – in that order. At the moment we do not see a preference for ESG investments over performance. The evidence so far is that while yield is still the least important, if ESG takes yield down by a fraction then investors continue to prefer that yield over ESG criteria.
It sounds like ESG is not yet much of a priority?
Yield is still important and if there is a choice between yield and an ESG filter, our observation is that the majority of the investor base would still prefer yield. That’s not to say that people don’t care and are not interested – they are – but given that trade-off the majority still appear to be going for yield, evidenced by the fact that there are very few ESG MMFs out there. But we see movement and there is definitely a groundswell of interest in ESG. Eventually we will reach a tipping point.
But in the meantime, we understand that there is this tension between desiring – and in many cases passionately desiring – an ESG lens on an investment policy, and on the other hand maximizing the yield of the portfolio. So, our own determination has been that we are not ready to fully repurpose our funds to ESG and implement this into our MMFs and give them the ESG badge – because we have this concern about whether all of our investors will necessarily follow us.
We apply what we call ESG Smart Integration (SMInt), whereby the ESG engine can be used to score the portfolio from an ESG perspective. While it doesn’t result in a full ESG badge, it does provide ESG elements and transparency. We are implementing Smart Integration into all of our MMFs and we are able to offer some look-through reporting and scoring of MMFs on a headline basis. We think this is probably the right hybrid for most of our clients right now.
How does DWS assist investors with the ESG journey?
We’re in the very early stages of some forward-looking companies figuring out how they can deploy their capital to offset their own carbon footprint. Apple has said it will become a carbon-neutral company by 2030, while Microsoft aims to offset all the carbon it has produced throughout its history. This is an area where asset managers like us can help, because we have some track record. The classic way for companies to start working on this is to go out and buy renewable energy certificates or carbon offset credits, to cancel their own footprint. That’s just an expense – a cost on the balance sheet. We offer an alternative: we are saying you can gain these types of certificates and credits by investing in certain types of strategies that themselves have a very strong renewables element to them. We do this in part through a private-equity renewables strategy. One area we specialise in is a China renewables strategy, which focuses on wind and solar power in China. We did this on a bespoke basis in 2018 – with Apple, on a China Renewable Energy Fund. Looking forward we are seeking to launch a commingled fund in a similar guise where we hope other companies will be able to pursue a similar goal over time. The strategy is to invest over the long term in China renewable energy with a view to making money and also earning credits. This is quite a smart way of doing it, rather than having it as a cost on the balance sheet.
What’s the role here for the corporate treasurer?
Deploying capital like this is something a company does at a strategic level, whereas the treasury is typically more concerned with its day-to-day funding. But treasurers are, of course, becoming more strategic in their role, more involved in long-term decisions about how a company deploys its capital. In fact, when it comes to the funds I just mentioned, the idea actually came from the treasury department. So now, the treasurer is having to respond to completely new dynamics, such as ESG, and that’s when these ideas start to percolate. As we engage on this more broadly, treasury will always be our starting point.
