What is Sustainable Investing?
Sustainable Investing is a broad investment category that incorporates Environmental, Social and Governance (ESG) factors into investment decisions as a means to better manage risk and potentially enhance long-term returns. ESG factors represent a true evolution of the investment playbook and are now an indispensable tool for helping investors aim for both better financial and social outcomes.
What does ES&G Factors stand for?
Generally, ESG is defined as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process
Environment
Climate change
Natural resources
Pollution & waste
Environment opportunities
Social
Human capital
Health and safety
Supply chain
Social opportunities
Governance
Risk management
Corporate leadership
Internal controls
Executive remuneration
Shareholder rights
As a broad category, Sustainable Investing covers a number of investment strategies, each with distinct traits that affect how portfolios are constructed, the degree to which philosophical views are expressed, and the extent of social impact. We see Sustainable Investing as falling mainly into four wide-ranging groups: Integrated ESG, Sustainable and Responsible Investing (SRI), Sustainable Development Goals aligned (SDG-aligned) and Impact Investing.
Our definition of Sustainable Investing
Integrated ESG
Integrating material Environmental, Social and Governance risks considerations into investment analysis and decisions without constraining universe
| • | Aims to improve risk-adjusted performance over a market cycle |
| • | Active ESG risk/ reward management in portfolios |
| • | No investment constraints |
Sustainable and Responsible Investing
Uses ESG assessments to create portfolios that reflect investors’ own values through the application of screening
| • | Aims to generate financial returns and a sustainable footprint by investment selection upon “Best-in-Class” approach |
| • | Active reduction of reputational risks |
| • | Constrained investment universe that avoids companies with subpar ESG practices |
SDG-aligned
Intention to contribute to positive environmental and societal change in alignment with one or multiple SDGs
| • | Aims to generate financial returns by investing in enablers of positive change |
| • | Focus on companies output and their alignment to one or several SDGs |
| • | Investment predominantly in companies whose SDG contribution can be assessed qualitatively |
Impact Investing
Generates measurable environmental and societal outcomes against specific KPIs in alignment with one or multiple SDGs
| • | Aims to deliver intentional and measurable positive outcomes alongside financial returns |
| • | Higher transparency on use of investments proceeds |
| • | Investments only in projects and securities where sustainable outcome can be measured |
The rising importance of ESG investing
ESG investing is growing in significance among investors worldwide. Many of them recognise the benefits of taking into account environmental, social, and governance factors alongside traditional financial metrics. Indeed, a growing body of empirical research suggests that understanding ESG factors can help investors better manage risk and enhance potential long-term returns.
1. Intangible factors are keys in determining market value
Financial statements only capture what is above the sea level. Therefore, traditional accounting based financial analysis is inadequate to cope with hidden risks and opportunities, which are very important to determine management quality and reputational risks. These ESG-related hidden risks and opportunities could create actual tangible impact on the performance of investment portfolios.
The iceberg balance sheet best illustrates the tangibles versus intangibles story
While accurate information on a company’s financial performance obviously remains extremely important, it is becoming a less and less complete story in a knowledge economy where an increasing percentage of a company’s assets are intangible ones that are not shown on the balance sheet. Intangible assets are for example reputation, human capital, intellectual property, customer loyalty, brand value. Many of these falls into the ESG category.
2. Sustainable investing gets to the core
Climate action failure stands out as the biggest global risk by impact, and many other environmental and social issues are among the top risks being perceived by world leaders. As a result, sustainable investing is no longer seen as a trend but as an essential consideration in portfolio management. With the investment industry at a tipping point, sustainable investing incorporates non-financial inputs, such as ESG factors, to generate sustainable outcomes as well as strong financial returns.
This trend is increasingly important for asset managers, companies and investors alike:
• Asset managers are driving capital towards sustainable companies and projects that address what investors view as the world’s biggest challenges.
• Companies are finding that seriously addressing issues such as climate change can better inform their strategy and help them improve their competitive position.
• Investors are seeing proof that a conscious approach using ESG factors can help manage risk and improve return potential.
This widespread recognition of the importance of sustainable investing has translated into USD 12 trillion of sustainable investing assets in the US in 2018, a rise of 38% over two years1. With an estimated funding gap of USD 6 trillion per year1 to fill to achieve the objectives outlined by the UN Sustainable Development Goals (SDGs) and the push of regulators to promote a more sustainable economy and finance, there is more change to come.
1 Source: The US SIF Foundation; US Sustainable, Responsible and Impact Investing Trends Report; October 2018.
ESG risks moving to the top of the agenda -
Top 5 Global Risks in Terms of Impact according to World Economic Forum surveys (2009 – 2020)
Source: World Economic Forum; The Global Risks Report 2020, 15th edition; January 2020.
3. Demand for Sustainable Investing is increasing rapidly
ESG allocations now account for more than one of every four dollars professionally managed in the US2. As a result, incorporating sustainability into investment decisions and actively engaging with companies to promote good ESG practices goes beyond just “doing good,” it’s also good business.
Overall, the growth of ESG assets has outpaced growth of the overall market. The impressive growth of responsible investing has been mainly driven by institutional investors. But also retail investors are getting more interested in responsible investing on the back of (social) media attention to world’s global challenges such as climate change, migration, inequality etc. And it’s not just millennials who are interested in responsible investing; there is a broad interest among all generations and in particular women. These groups want to know how their money is being invested and how this contributes to society, going beyond pure financial value generation.
2 Source: The US SIF Foundation; US Sustainable, Responsible and Impact Investing Trends Report; October 2018.
Demand for sustainable investments among
institutional investors is growing
0%
of institutions want all their portfolios to be ESG-compliant by 2030
0%
of institutions are familiar with Impact Investing and Integrated ESG
0%
of institutions would boost Sustainable Investing allocations if benchmarks were clearer
Source: Oxford Economics; Global survey of 490 institutions carried out for Allianz Global Investors; December 2018.
ESG Research and Stewardship
Dedication to proprietary ESG Research
Asset managers committed to Sustainable Investing do not rely exclusively on third-party ESG ratings, but instead, collect information from an in-house research team. ESG research is growing in importance for several reasons:
| • |
The risk spectrum has changed: Investors today need to assess ESG factors to properly evaluate investment risks. Traditional accounting tends to overlook ESG factors as they were underreported by companies. The landscape has since changed as evidence shows that companies with better ESG profiles tend to generate better risk-adjusted returns. |
| • |
Third-party ESG research is inconsistent: While third-party corporate credit ratings are mostly consistent, there are significant inconsistencies in companies’ ESG ratings provided by different rating agencies, as they have varying methodologies and objectives. Therefore, it is imperative for asset managers to undertake proprietary ESG research to identify the real market-beating companies. |
1. Active Stewardship
What is Active Stewardship? It’s a commitment to drive positive change by engaging with the management teams of potential portfolio companies. Such engagement requires active involvement from portfolio managers and analysts.
Active Stewardship helps companies reduce downside risks and unlock their alpha potential, which in turn drive performance in the investment portfolios—in terms of both financial returns and social and environmental impact.
Global stewardship activities, such as engagement and proxy voting, improve investment decision making, enhance a company’s risk profiles, and deliver societal benefits. These are the core stewardship activities asset managers engage in.
Active
Stewardship
Stewardship
Active involvement from portfolio managers and sector analysis.
Engagement
Active managers routinely engage in dialogue with investee companies and seek to proactively present a viewpoint and seek change where necessary.
Proxy Voting
Take fiduciary obligations to be an active shareholder who actively exercise voting rights.
2. A Holistic Set of ESG Solutions
Sustainable investing covers a broad range of issues that require more than a cookie-cutter approach. Investors with different sustainability goals in mind seek to influence the society or economy in their own ways through allocation of capital. Designated strategies can customise investments with a specific goal, such as addressing the need for clean water, or curbing carbon emissions. This is where a holistic approach of ESG investing comes in.
Integrated ESG
Integrated ESG corresponds to active ESG risk management aimed at better financial returns. Within this approach, active managers integrate financially material ESG factors into investment analysis and decision making in a systematic and disciplined way, without constraining the investment universe. This approach requires active management beyond external ESG ratings and third-party methodologies.
Sustainable Responsible Investing (SRI)
SRI strategies aim to create a sustainable portfolio by combining financial and sustainability assessments in investment analysis and portfolio construction. The offering appeals to investors who want their investments to not only generate financial value, but also to reflect their own values.
Investing for Impact / SDG-aligned themes
Impact investing intends to generate societal benefits that are aligned with the UN Sustainable Development Goals (SDGs). The 17 global SDGs were set by the UN General Assembly in 2015 as a way of achieving a better and more sustainable future by 2030s. A qualified impact investing strategy creates incremental positive social and environmental value while delivering financial returns.
Commitment to Responsible Investing
The investment industry is at a tipping point: Investors realise they can impact the world by choosing where and how to make investment. Sustainable Investing is no longer considered as an externality to be dealt with through philanthropic approaches; rather, it is becoming an intrinsic part of asset managers' investment decisions.
1. Allianz Global Investors’ SRI Footprint
Sustainability is an integral part of Allianz Global Investors’ (AllianzGI) business and value system. We are one of the world's first financial services providers to embrace social responsible investing. We actively engage with leading organisations to help shape dialogue and best ESG practices.
AllianzGI is also one of the first global asset managers to appoint a Chief Sustainability Officer (CSO) to signal how seriously we take sustainability.
Since 1999, AllianzGI has been committed to SRI
First global SRI equity strategy launched
AllianzGI amongst the 50 first signatories of the UN Principles for Responsible Investing (UN PRI), which now has close to 2,000 signatories
We were among the first 3 asset managers globally supporting climate or environmental projects – ahead of the Paris climate conference in 2015
First mover with Africa Grow: first German blended finance vehicle to invest in the Private Equity and Venture Capital sector in Africa
We commit to continuous innovation to support a socially responsible transition to a low carbon economy
Source: Allianz Global Investors; January 2020.
2. A Track Record of Responsible Investing
AllianzGI has committed to continuous progress in Sustainable Investing. For example, we signed the United Nations’ Principles for Responsible Investing (PRI) in 2007, placing us among the first 50 asset managers to sign a pact that now has more than 2,500 signatories. Many are coming to this trend only recently; nearly 900 UN PRI signatories joined the accord since the start of 2018.
AllianzGI received an A+ for the fourth consecutive year from the PRI Association for its overall approach to ESG Strategy and Governance, the category encompasses AllianzGI’s ESG policies, objectives and memberships of various organisations, and considers how the firm promotes ESG efforts internally and externally. Overall, AllianzGI achieved the highest possible, ‘A+’ score for five categories: Strategy & Governance, Listed Equity – Incorporation, Listed Equity – Active Ownership, Fixed Income – Corporate Non-Financial and Infrastructure Equity. The annual assessment aims to provide feedback to support the ongoing development of signatories' E, S & G credentials.
| Module name |
AllianzGI score 2020 | AllianzGI score 2019 | Median score 2019 |
| Strategy & Governance | A+ | A+ | A |
| Listed Equity: Incorporation | A+ | A+ | A |
| Listed Equity – Active Ownership | A+ | A | B |
| Fixed Income – SSA | A | A | B |
| Fixed Income: Corporate Financial | A | A | B |
| Fixed Income – Corporate Non-Financial | A+ | A | B |
| Fixed Income – Securitised | A | A | B |
| Infrastructure Equity | A+ | A+ | A |
Source: PRI; August 2020.
The PRI Assessment Report aims to provide feedback to signatories to support ongoing learning and development. Each module score ranges from “A+ (highest score) to “E” (lowest score) and is calculated from a respective set of indicators grouped together in module specific sections. 2020 scores refer to reporting period January 2019 - December 2019, while 2019 scores refer to reporting period January 2018 - December 2018.
3. Collaborative ESG Initiatives
Sustainable investing can generate positive performance not just for investors’ financial returns, but for the community at large. AllianzGI is actively involved in a wide array of collaborative ESG initiatives and memberships. By partnering with industry leaders, we are committed to contributing to more sustainable economic growth and a better, more productive future.
Key ESG initiatives
and memberships
and memberships
The need for greater transparency among business has come to the fore as society’s expectations continue to grow. As it is especially important for the financial service sector, which has a huge responsibility – and opportunity – to support societal priorities such as the United Nations (UN) Sustainable Development Goals (SDG).
Art on Climate
Art can be a powerful tool to provide new perspectives on the global discussion on climate challenges and solutions. In 2019, AllianzGI’s Iberia division launched “Art on Climate”, an international art competition to raise awareness of climate change and foster solutions to address it. Nearly 450 artists from 69 countries have submitted more than 900 original works. The artists expressed optimism for a better world – a vision shared by AllianzGI as we continue to contribute to the change towards a low-carbon economy."
Carbon Footprint
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The way we behave impacts the environment, from our travel habits to how we invest. In order to keep the rise in the global average temperature limited to well below 2°C, the EU set the target of reducing greenhouse gas emissions by 95% by 2050.
Insights
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Assessing climate risk in portfolios
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23/06/2020 |  |
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Investing for a sustainable future
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16/06/2020 | |
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Covid-19 and ESG Implications
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31/05/2020 |  |
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Preparing for impact
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03/12/2019 | |
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Active is: Becoming more eco-friendly
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10/09/2019 | |
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Hong Kong Green Organisation Certification
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10/09/2019 | |
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Impact Investments – a new philosophy of investing
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28/08/2019 | |
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Tail Risks in ESG
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31/06/2019 | |
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EU accelerating economic growth through sustainability
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31/05/2019 | |
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ESG – “plus” for sustainability, “plus” for performance?
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25/09/2018 | |
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Controlling ECO Footprint ESG
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22/08/2018 | |
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ESG in Equities
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27/07/2018 | |
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ESG in Investment Grade Bonds
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26/07/2018 | |
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ESG in Sovereign Bonds
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26/07/2018 | |
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What’s the Tradeoff for ESG Investing?
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21/12/2017 | |