We are delighted to announce the winners of the 2020 PRI Awards. These projects were selected from almost 120 entries, sent in by PRI signatories headquartered in 25 countries.  

All winning and shortlisted projects have been published below.  

We would like to express our gratitude to the independent judging panel, who kindly gave up their time to review all the entries against category-specific criteria. 

Congratulations to all the winning and shortlisted projects!

ESG incorporation initiative of the year 

Winner

FTSE developed TPI climate transition index – aligning a global equity portfolio with the climate transition
FTSE Russell, Church of England Pensions Board & Transition Pathway Initiative

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

FTSE Russell created the FTSE Developed TPI Climate Transition Index in collaboration with the Church of England Pensions Board (CofE) and the Transition Pathway Initiative (TPI).  

The partnership sought to embed forward-looking data from TPI into an index that served both the financial and climate objectives of the CofE, as well as provide a product that the wider market could use to support investor stewardship, corporate engagement, and the transition in line with the goals of the Paris Climate Agreement. 

Launched in January 2020, the index provides investors with benchmarks informed by cutting edge analysis to align a broad equity portfolio with climate transition, the goals of the Paris Agreement, and the TCFD recommendations. The Index’s transparent methodology includes tilts and rules that are simply articulated and linked to the Paris Agreement. 

The CofE is moving its £600 million passive developed equity mandate to track the Index, supporting the Pension Board’s objective of aligning its fund with the goals of the Paris Agreement.  

How does this approach stand out in the market? Why is it unique? 

The Index is the first forward-looking equity index that enables passive funds to capture company alignment with climate transition. It combines FTSE Russell’s climate data and expert index design, with TPI’s unique analysis of how the world’s largest and most carbon-exposed public companies are managing the climate transition. The index takes into account: 

  • Coverage: Derived from the FTSE Developed index, representing large and mid caps in Developed markets, excluding Korea. 
  • Liquidity: Stocks are screened to ensure that the index is tradable. 
  • Transparency: Using FTSE Russell’s tilt-based multi-factor methodology. Company engagement on climate change improves their TPI score, which leads to their weight in the index increasing and consequently more investment in-flows. 
  • Climate parameter adjustments: Fossil fuel reserves, carbon emissions, green revenues, TPI Management quality, TPI Carbon performance. 

The result is an index that captures the risks and opportunities arising from the climate transition, while also adjusting exposure to companies based on their TCFD-aligned climate governance, and commitments to two-degrees Celsius (2DC) carbon emission pathways. 

Leading and lagging company behaviour is clearly reflected in the areas of climate governance and (separately) 2DC/below 2DC pathways. In particular, companies identified as not aligned to 2DC/below 2DC are removed from the index (but remain eligible for inclusion and can be re-admitted once ‘Paris aligned’ commitments are evident – based on TPI analysis). 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

The challenge in creating the index was to adjust the index constituent weights using ‘tilts’ (over/under weights) based on a range of constituent-level data, whilst minimising tracking error to the parent benchmark.  

Over an 18-month period the CofE’s objectives and requirements were tested against a variety of simulations, which led to the refinement of the index design. FTSE Russell, TPI and the CofE also undertook a consultation amongst 100 peers on the parameters of the index.  

The result is an index that significantly reduces fossil fuel reserves and carbon emissions exposure whilst increasing exposure to companies generating green revenues. Importantly, the exclusion of companies does not represent disinvestment but differentiation within key energy intensive sectors and therefore a sensible recognition that there is a path for an oil and gas company, steel company, cement company to transition if they set independently verified targets aligned to the Paris agreement. 

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

The development of the Index has been an important project for the CofE, which has allocated £600million to a fund tracking the Index. This is a significant switch of its Developed Market passive equities portfolio from an index that, in effect, tracked a 3.8 degree world (and c.20% of its AUM). Adopting this index for the CofE’s passive allocation means the Fund will achieve a 49.1% lower carbon intensity than the benchmark, as well as being invested in companies generating significantly increased green revenue. 

The initiative has had a number of significant outcomes: 

  • The Index provides increased exposure to the opportunities arising from the global green economy, with overweights based on FTSE Russell’s Green Revenues dataset. 
  • The incorporation of TPI’s core assessments on management quality provides the Index with a forward-looking capability, assessing companies on their plans for transition to a low carbon economy. 
  • The Index also supports engagement between investors and companies, incorporating a tool that can signal 2DC transition progress and performance to constituent companies. 
  • The Index caters to the growing investor demand for more sophisticated implementation approaches to climate change whilst also meeting existing needs for portfolios with significantly lower carbon emissions (-40%) and fossil fuel reserves (-70%) exposures versus capitalisation weighted benchmarks. 

In terms of applying the initiative more broadly, the creators of the index learned that: 

  • It is possible to embed forward-looking carbon data based upon whether companies are aligning with the Paris Agreement. 
  • That stewardship and/or engagement objectives can be supported through passive investments. 
  • It is possible to incentivise the transition through the use of titles that reward leading companies with double weightings/allocations.
  • It is possible to align passive investments to the Paris Agreement. 

Shortlist

Issuer ESG evaluation framework
BlueBay Asset Management

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

In August 2018, BlueBay formalised its approach to ESG risk analysis by creating its Issuer ESG Evaluation Framework. This framework was developed so that BlueBay’s investment managers could: 

  • Primarily focus on risk, given their emphasis on capital preservation. 
  • Better account for improving ESG performance momentum, as BlueBay felt third-party ESG ratings could often be backward looking.
  • And to better account for the potential for multiple ESG credit risks associated with a single issuer, given an issuer may have multiple bonds with different credit characteristics.

BlueBay’s credit analysts conduct the initial ESG analysis, working closely with the firm’s ESG specialists, who then finalise the assessment. The analysis is conducted as standard for all new qualifying investments. 

As of April 2020, BlueBay has evaluated over 1,200 corporate and sovereign issuers, which represent over 90% of its held investments. Although the actual content of the issuer ESG evaluation varies for corporate and sovereign issuers, both result in same two proprietary ESG metrics: 

  1. A Fundamental ESG (Risk) Rating, which indicates a view on the quality of management of material ESG risks and/or opportunities faced by the issuer. There can only be one Fundamental ESG (Risk) Rating per issuer across BlueBay.
  2. An Investment ESG Score, which reflects an investment view on the extent to which the ESG factors are considered relevant to valuations, which is decision based and security specific. It also describes the nature of that materiality (i.e. positive, negative, neutral). As it is based on individual securities, there may be multiple Investment ESG Scores for a single issuer. 

These two ESG metrics are used as inputs alongside conventional credit scores by portfolio managers to inform their portfolio construction decisions. 

Since 2019, the two resulting issuer ESG metrics have fed into the Alpha Decision Tool, an in-house platform which enables investment teams to capture and monitor trade ideas. Whilst initially the ESG evaluation framework was housed separately from conventional credit research, in 2020 the analysis was embedded within the firm’s centralised in-house research platform, the Alpha Research Tool, placing all credit and ESG research in one place.  

ESG data and insights also feed through to Portfolio Insight, another proprietary tool that enables investment teams to view internal and external ESG metrics for their portfolios and associated benchmarks. 

How does this approach stand out in the market? Why is it unique? 

The issuer ESG evaluation allows BlueBay to demonstrate how ESG dynamics may play out in fixed income investing (compared with equities), as well as potentially between different debt strategies and issuer types (corporates, sovereigns and state-owned enterprises). In addition to this, it explicitly complements ESG insights gained from external sources with in-house knowledge and expertise. Making ESG insights visible and accessible alongside conventional credit metrics, such as conviction scores, promotes accountability by the firm’s risk takers.  

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

The issuer is a drug company that acquires and markets off-patent branded medicines. It previously reportedly took advantage of a loophole that enabled it to impose price rises on a limited number of drugs if it dropped an existing brand name and sold it under its generic name instead. A regulatory investigation concluded it did not break competition law. 

BlueBay’s high-yield credit analyst, who reviewed the company in 2019, initially decided not to invest. A ‘High’ Fundamental ESG (Risk) Rating and a ‘-2’ Investment ESG Score (high ESG investment related risks) were assigned, linked to the issuer’s exploitative pricing practices, which reflected poorly on its governance and damaged its reputation.  

However, in working through the ESG framework, the analyst was able to distinguish between past and future performance issues, acknowledging the company was making changes. After speaking with the company’s management and its shareholder, it became clear that the new private equity owner had taken robust action to promote an ethical culture. This included establishing a Social, Governance & Pricing Committee. Now that BlueBay had tangible evidence of change, it felt able to invest in the issuer, and will consider adjusting down the Investment ESG Score to ‘-1’ if it remains controversy-free. 

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

Bluebay’s Issuer ESG Evaluation Framework has led to tangible benefits for both analysts and investment professionals alike. These include: 

  • Greater ESG awareness and ownership by credit analysts.
  • Greater engagement between ESG, credit analysts and portfolio managers. 
  • Investment teams are more active in bringing up ESG matters with issuers. 
  • A more holistic issuer ESG assessment.  

Being able to consider ESG issuer risks and investment risks separately has proven to be of great benefit to BlueBay’s investment teams. As a result, portfolio managers not only consider ESG risks that directly influence bond prices, but are also able to identify ESG blind spots that markets are potentially not pricing correctly, if at all.  

Finally, the framework has also fostered accountability and transparency with BlueBay’s clients, as it has been able to use the outcomes to clearly illustrate how it has integrated ESG factors in their portfolios. 

Looking ahead, BlueBay has begun to explore how to apply, and potentially adapt, this approach to its structured credit strategies, having successfully done this for the private debt business (which has since been demerged). 

Externally, BlueBay has been sharing its Issuer ESG Evaluation Framework with peers and other key stakeholders. It has served an educational purpose to better understand how to think about integrating ESG in debt investing, by highlighting the similarities and key differences between integration in debt vs. equities, as well as between debt asset classes, and issuer types. 

Mainstreaming ESG integration
BNP Paribas Asset Management

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

BNPP AM has consolidated its position as an early leader in sustainable investment with the launch of its Global Sustainability Strategy (GSS). Launched in March 2019, it is a firm-wide blueprint to mainstream BNPP AM’s sustainable investment culture. 

As part of the GSS, BNPP AM defines four pillars of sustainable investment: 

  1. ESG integration
  2. Stewardship 
  3. Responsible Business Conduct Expectations and sector-based exclusions 
  4. A Focus on the Future.  

The final pillar is a forward-looking perspective to enhance investment decision-making by focussing on three key sustainability issues that the firm believes will be critical pre-conditions for a more sustainable and inclusive economic system: energy transition, environmental sustainability, equality, and inclusive growth. 

At the core of all BNPP AM’s investment processes, analysts and portfolio managers integrate relevant ESG factors into their company, asset and sovereign evaluation and investment decision-making processes. This allows them to identify and assess areas of risk or opportunity which may not be understood by all market participants, and which could give them a relative advantage.  

BNPP AM’s goal was that by 2020, every investment process and strategy will have been reviewed and approved by the firm’s ESG Validation Committee. As of the end of 2019, The Committee had validated 59 processes covering 295 strategies, which is the equivalent of 935 funds and mandates including BNPP AM’s full flagship range. 

BNPP AM’s 25-person, multi-disciplinary Sustainability Centre provides investment teams with research, analysis and data at company and sector levels, and supports the integration of sustainability-related risks and opportunities into investment strategies. BNPP AM has increased the coverage of its ESG research from 2,600 to over 12,500 companies by 2020. 

How does this approach stand out in the market? Why is it unique? 

BNPP AM decided to put sustainability at the heart of its strategy at the firm level, and while there are a handful of boutique firms that do this, BNPP AM’s size and scale makes this unique among the larger asset managers. In addition, BNPP AM’s approach stands out because:  

  • All the firm’s investment strategies aim to have better ESG scores and lower carbon footprints than their benchmarks.   
  • All the assets of the firm, from real assets to systematically managed portfolios, are covered by its ESG strategy.  
  • BNPP AM has a structured way of integrating ESG research into all of its investment platforms, and has plans to consistently measure and report on it.  
  • The entire company is involved in the company’s sustainable journey: everyone from investments to sales-and-marketing to accounting and procurement. 
  • BNPP AM engages with regulators, stock exchanges and other industry bodies to promote a range of outcomes – from mandatory corporate ESG reporting to the mainstreaming of ESG futures. 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

One example is private infrastructure debt, where BNPP AM pre-screens the sponsors and then carries out an ESG analysis on the operational aspects of the project using a specific taxonomy to identify the nature of the activity, its environmental and social contribution and/or impact.  

This is followed by an ESG assessment of the underlying asset itself and how it is managed, making it possible to assess the practical integration of ESG considerations into the management of the project. It includes both qualitative criteria, namely the ESG management systems set up by the sponsor, the ESG policies developed, standards deployed, and quantitative criteria relating to environmental and social performance.  

The final step is an impact assessment, which is carried out by an independent expert and focuses on calculating the induced and avoided emissions, the project’s alignment to a two-degrees Celsius trajectory and its contribution to the energy and ecological transition. 

For BNPP AM’s multifactor strategies, the fund managers use the ESG ratings of the Sustainability Centre and carbon footprint data, a proprietary calculation done in-house, to improve the average ESG decile rating of the strategy by 20% and reduce its carbon footprint by 50% relative to its benchmark. 

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly

BNPP AM’s firm-wide, target-driven approach has yielded several transformational outcomes for the firm: one of which lies in having all investment teams include ESG criteria in a material way in their strategies.  

Success can be measured in three ways: 

  1. PEOPLE: An important milestone of BNPP AM’s ESG integration drive has been the appointment of ESG Champions around the world. They are the link between the Sustainability Centre and the investment teams and keep abreast of relevant ESG market developments, as well as updates to ESG research methodology, exclusion policies and stewardship activities. 
  2. PERFORMANCE OBJECTIVES: All chief investment officers and ESG Champions have sustainability as one of their performance objectives. In transforming the firm’s ESG culture, BNPP AM found it critical to involve investment experts from the bottom-up, rather than dictating terms and conditions top-down, to empower them and multiply the number of sustainability ambassadors.  
  3. TRAINING: Additional firm-wide online training and resources for all staff are organised centrally, as BNPP AM works to enhance the firm’s overall capacity on ESG issues. 

The figures bear out the success of the strategy: When analysing the top 100 gross inflows of 2019 into BNPP AM’s strategies, ESG was the key success factor in 10% of deals, and a supporting factor in 29% of deals.  

Accelerating integration of green generalist sustainable investing style into mid-market infrastructure investing
ICG, Oceinde Communications

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

ICG decided to build on its already robust ESG Framework by developing a Sustainable Framework to apply to its new infrastructure strategy. The strategy focuses on the less competitive mid-market segment, capitalising on the team’s experience sourcing deals with European corporates and creating operational value.  

This was a multi-team initiative, strongly endorsed by ICG’s CEO and CIO, involving senior management, the investment team, the firm’s responsible investing officer, and ESG Committee members.  

The team decided to select the UN Sustainable Development Goals (SDGs) as an overarching framework for its sustainability approach. And, as a result, ICG’s infrastructure strategy now contributes to the following SDGs: 7 (Affordable and Clean Energy), 9 (Industry, Innovation and Infrastructure), 11 (Sustainable Cities and Communities) and 12 (Responsible Consumption and Production). 

ICG’s Sustainable Framework includes the following: 

  • Adding high-carbon emitting industries, such as coal oil and gas, to ICG’s exclusion list, as well as nuclear.
  • Enlarging ICG’s Screening Checklist to specifically identify how a potential investment’s core activities could positively contribute to the SDG during due diligence.
  • Engagement with management teams to establish ESG KPIs and targets along with mapping of the company’s core activities to the relevant SDG targets.
  • A carbon footprint analysis of the portfolio along with annual fund-specific ESG reporting to investors. 
  • Participation in annual GRESB Infrastructure assessments. 

How does this approach stand out in the market? Why is it unique? 

ICG is one of the very few generalist investors within the European infrastructure market that has explicitly excluded oil and gas as part of its sustainable approach.  

From the outset, ICG decided to be a ‘green generalist’. It recognized the potential of the strategy to generate positive social, environmental and economic impacts and to contribute meaningfully to achieving the SDGs. ICG assesses the direct contribution of these assets’ core activities to the relevant SDGs, which are monitored and quantified annually using key metrics. These metrics rely heavily on the Global Impact Investing Network’s IRIS+ taxonomy and the Impact Management Project. Extensive engagement with management is key, along with incentivising management to achieve specific ESG targets. 

As testament to investor demand for its sustainable financial products, the EIB approved a significant investment (min. €75m) in the strategy as part of its new green policy. 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

The practical application of ICG’s framework has been a learning curve. For example, considerable time was spent assessing an asset in the shipping industry, as the lower carbon footprint (compared to alternative forms of transport) was compelling. However, the company generated a very small amount of revenue from the transportation of coal (c. 3%) along with fuel and gas (c.1%). ICG reviewed the EU taxonomy for Sustainable Finance, which provided clear guidance on sustainable investing in Inland Waterway transport, and the qualifying criteria. These required substantial GHG emission reduction, ideally zero emissions, or dedicated vessels using advanced biofuels. 

Further investigation revealed that the company was in the process of phasing-out coal transportation and had terminated three major contracts in the previous 12 months. In addition, the company had developed a ‘green shipping programme’ that was actively exploring green technologies (electric propulsion, hydrogen fuel cell, LNG powered engines) and had set ambitious GHG reduction targets.  

ICG’s investment would support this green transition in the longer term along with near-term fleet modernisation and training ships’ captains in ecological operating - improving energy efficiency and contributing to SDG 7 and SDG 9. 

Although the investment adhered to ICG’s Sustainable Framework, the deal did not progress.  

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

This approach has proved it is possible to take a traditional asset class and apply a ‘green generalist’ Sustainable Framework that maximises the fund’s contribution to achieving the SDGs. The strategy deliberately focuses on just four SDGs, for maximum impact. ICG also developed a process to map how each asset contributes to the SDGs through the use of key metrics. 

For example, ICG’s investment in Ocea, a leading French energy and water metering business, contributes directly to SDG 7 and SDG 6. And ICG is monitoring access to metering, cost and energy/water savings, along with corresponding GHG emissions that have been avoided. The company is also investing in electric vehicle charging stations and, again, ICG are tracking the impact in terms of access, usage and GHG emissions that have been avoided. 

Oceinde Communications, a business telecommunications company in the French territory of Reunion Island, was the first to offer unlimited data at a very accessible tariff, contributing to SDG 9.  

Key metrics include the total and new number of poor and rural households serviced annually. Investment in the new submarine cable will significantly increase capacity and connectivity to the mainland, contributing to GDP growth (SDG 1 and SDG 11). And the use of fibre supports SDG 7, by improving energy efficiency, as fibre uses up to 12 times less energy than traditional copper DSL cable. And ICG can quantify the energy saved and corresponding GHG emissions avoided annually. 

In developing and implementing its Sustainable Framework for its infrastructure strategy, ICG realised the framework could be relatively easily replicated, with some minor modifications, to new and existing strategies. This will improve the accessibility of sustainable financial products targeting the SDGs. ICG has since successfully applied its Sustainable Framework to a newly launched real-estate strategy. 

Incorporating the EU Taxonomy into investment management
SEB Investment Management

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

In 2019, SEB Investment Management’s quantitative equities team incorporated the EU’s Sustainable Finance Taxonomy into its portfolio management. It did this in collaboration with SEB’s Large Corporates and Financial Institutions division. 

The project had three main objectives: 

  1. To develop a systematic model to measure SEB’s equity portfolios’ alignment to the EU Taxonomy  
  2. To evaluate the Taxonomy alignment of SEB Investment Management’s active sustainable equity funds, as well as to compare the competitive landscape for sustainable mutual equity funds. 
  3. To consider the possibility of incorporating the Taxonomy model into the investment decision-making process. 

SEB Investment Management’s quantitative equities team manages 31 active equity funds, with total assets under management of $13.5 billion, and so it was imperative to develop a model that could measure all listed equities efficiently.  

SEB created a quantitative model in order to do this. The SEB EU Taxonomy Model estimates the Taxonomy alignment of economic activities systematically by approximating the technical screening criteria, based on the EU’s Technical Expert Group (TEG) on Sustainable Finance rationales.  

A process to measure “Do no significant harm” and “Minimum safeguards” criteria is under development but not yet part of the current model version. Reported and estimated sustainability data are used to assess activities, defined by company revenue streams. 

How does this approach stand out in the market? Why is it unique? 

Prior to the development of the model, Taxonomy alignment could at best be estimated in concentrated portfolios, predominately using fundamental analysis – an approach that is ill suited to broad portfolios with many holdings. What was needed was a quantitative model. 

The SEB EU Taxonomy model stands out in the market as a completely quantitative model to evaluate equity portfolios. It covers over 99% of the global equity market capitalisation, enabling insights and comparisons on a broader scale than previously possible. 

As of today, scalable and complete data for evaluating the Taxonomy technical screening criteria is limited in the market. SEB’s model measures alignment with existing sustainability data and approximates the technical screening criteria when needed. The model is flexible enough to capture future updates of the Taxonomy. 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them

According to SEB’s model, the Taxonomy alignment of its funds ranged between 2.9% alignment and 9.9%, with an average alignment of 6.6%. This was in line with a peer study performed on 105 sustainable mutual equity funds with an average alignment of 6.8%. Taxonomy alignment for a global equity index was 6.6%. 

SEB used a global equity fund with current assets under management of $985 million and a Taxonomy alignment of 9.1% as a case study. The question was posed: How could Taxonomy alignment of this fund be increased while maintaining its current characteristics? SEB took a three-step approach: 

  1. If SEB allowed for moderate active sector and country allocation (+/-2%) and limited carbon emissions in line with benchmark carbon emissions, it could be possible to create a portfolio with 40% Taxonomy alignment.  
  2. Approximately the same results could be achieved by limiting carbon emissions to half of the benchmark for carbon emissions (based on the proposal from TEG for Paris Aligned Benchmark). 
  3. If SEB allowed for higher active sector and country allocation (+/-5%) and limited carbon emission to half of benchmark carbon emission, it could construct a portfolio with 50% Taxonomy alignment. 

In conclusion, the SEB EU Taxonomy model can be applied in a systematic investment process to increase Taxonomy alignment significantly, from 9.1% to 50%. 

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

This project has strengthened the hypothesis that environmental sustainability can be measured systematically based on an objective model. In order to measure the success of the initiative, SEB looked at the three project objectives outlined in the first section. 

Objective 1 The EU Taxonomy offers a scientific approach to identify companies that will encourage the transition to a low-carbon economy. The SEB EU Taxonomy model expands on this scientific approach by enabling systematic measurement of portfolio Taxonomy alignment. The model is live and capable of measuring the potential Taxonomy alignment of any equity portfolio. What proved to be more difficult to assess, from a quantitative perspective, was the “Do no significant harm” and “Minimum social safeguards” criteria - these are still under development. 

Objective 2: The model has been successfully used to evaluate the current alignment of SEB Investment Management’s Quantitative Equities sustainable funds specifically, as well as a peer group of sustainable mutual equity funds. SEB learned that its funds had varying degrees of alignment and that its average was close to that of the peer group. For the peer group, Taxonomy alignment was lower than expected (6.8% compared to 6.6% for a global equity index), leading to the important insight that the implementation of the regulation will force sustainable funds to reallocate capital in order to report an alignment significantly different from their current benchmarks. 

Objective 3: The positive results from the evaluation phase gave further motivation to incorporate the SEB EU Taxonomy model into the investment process. This incorporation is still going on. SEB research suggests it can use the model in its systematic investment process to significantly increase Taxonomy alignment. 

One important lesson SEB learned was that certain sectors offer higher Taxonomy alignment (utilities and communication services) while others have close to no alignment (healthcare). Consequently, the degree of investors’ acceptance of active sector allocation and active risk will be the limiting factor in reaching a high alignment. Nevertheless, Taxonomy alignment of sustainable funds can be significantly improved with small deviation from their benchmarks.  

Another important insight is that a high level of alignment can be achieved also when controlling for carbon emissions. 

In addition, the scope of the model has proven broader than that of investment management. It can be extended to evaluate SEB’s credit portfolio and has been used in advisory to institutional and corporate clients.  

Stewardship project of the year

Winner

Investor Mining and Tailings Safety Initiative
Church of England Pensions Board and the Council on Ethics of the Swedish National Pension Funds

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

The Church of England Pensions Board and the Council on Ethics of the Swedish National Pension Funds used direct shareholder action at mining companies to ensure that lessons were learned from the 2019 Brumadinho disaster in Brazil, which killed 270 people. The co-founders were driven by a desire to make sure that the systemic risk posed by waste in the mining sector was properly understood and addressed.  

In January 2019, a mining tailings (waste) dam belonging to Vale collapsed and killed 270 people. The disaster followed a previous tailings dam collapse in November 2015, in the same region, at another Vale operation at the Samarco joint venture with BHP. On that occasion, 19 people were killed and extensive damage was caused to the environment.  

Back in 2015 and 2016 Vale and BHP gave assurances to investors that the issues that led to the disaster had been addressed. It turned they had not. It became clear that a much more systemic intervention was required by investors if the risk to life and the environment posed by tailings dams was to be addressed.  

The Investor Mining & Tailings Safety Initiative was established shortly after the Brumadinho disaster. It is supported by 114 investors with over $14 trillion in assets under management. The initiative sought world leading expert input at a series of investor roundtables, and identified the following five issues: 

  1. There was a trend of increasing catastrophic dam failures combined with a failure to implement past recommendations. 
  2. There was a lack of a global industry standard on tailings management. 
  3. There was an unknown number of tailings dams in the world and no global record of where they were. 
  4. No Disclosure standard existed for company reporting on tailings dams. 
  5. Fundamentally, waste has been treated as an externality with the cheapest storage options in many instances. 

Describe how your project is aligned to Active Ownership 2.0, including:

a. The significance of the systemic, real world outcomes it seeks. 

Tailings dams are some of the largest constructions in the world intended to last in perpetuity. There is no global record of their locations or standards of operation and the significance of this initiative are stark: lives saved, environmental depredation avoided and prevention of company value destruction.  

After previous disasters actions were left to companies. This time investors were intent on driving the systemic change needed and as such a number of interventions were made: 

  • Establish a Global Tailings Standard. The International Council on Mining and Metals (ICMM), which represents the top 30 largest global mining companies in the world, worked with the PRI and the United Nations Environment Programme (UNEP) to establish an independent Global Tailings Review.  
  • Identify World’s Tailings Dams. There was no public record of where dams were located, standards of operation or ownership. The initiative made an urgent disclosure request to 727 listed extractives companies seeking detailed disclosure on each individual facility.  
  • Develop Global Public Database. The co-chairs established a global database at the UN-backed research company GRID-Arendal, to drive performance and best practice. The site incorporates satellite imagery and compares 1,900 facilities.  
  • Establish a 24/7 global alert system to facilitate tailings insurance provision and accelerate technology to enable the identification and removal of the most dangerous dams. 

b. The ambition, ingenuity or effort in the responsible investment tools/activities that were deployed. 

The initiative has demonstrated it is possible through concerted efforts, over a short timeframe, to place investors in a leadership role to shape a global response to a disaster that should not have happened, but could easily happen again. 

The Pensions Board and the Council of Ethics believe that this kind of collaboration, intervening in a decisive and public way to reshape an industry, is consistent with Engagement 2.0. The following actions were critical to the success of the initiative:  

  1. The ability to respond immediately: The co-founders were able to form an urgent collaboration within days of the disaster. And to agree a common position and make a public intervention to shape the response following the initial disaster recovery phase.  
  2. Rapid expert knowledge gathering: the co-founders convened five urgent expert roundtables of investors in an open transparent manner with industry and leading academics at the table. This enabled them to work through the issues together, but with investors in the lead to identify potential solutions and interventions. These events saw between 60 and 120 in-person participants, and further online attendance. 
  3. Consistent involvement of affected communities: Contributions through conference calls, written statement and in-person testimonies challenged company reporting of circumstances around the affected areas as well as investor understanding of the issue. It kept the initiative very clearly focussed on the issue. 
  4. Coalition building: The initiative is supported by 114 institutions with over $14 trillion in AUM. The co-founder also involved key governments, including the UK, Brazil and Chile.  
  5. Willingness to Set the Agenda to Generate Momentum: Throughout the co-founders have sought to set the agenda at pace and in public (often reported in the media including WSJ, Bloomberg, FT, Reuters, New York Times). When they identified an issue, they made an intervention. This generated considerable momentum. 

c. The challenges associated with this initiative (e.g. free rider issues hindering first movers) how these were overcome, and what was learned. 

Ensuring prominence of community voice(s): This was the greatest challenge given the disaster was in Brazil and the inevitable language challenges. Due to the nature of the initiative many senior company representatives were present in person whilst community representatives were initially only present through conference calls or written statements. This was an imbalance that needed to be addressed and the co-founders did so by ensuring a community presence at key moments in the initiative, as well as supported travel and interpretation. The Pensions Board and the Council of Ethics also partnered with local organisations in Brazil, such as the Business and Human Rights Resource Centre Brazil Office, and the NGO Caritas Brazil, and worked through LAPFF who had greater expertise in this regard. 

Differences in community perspectives and with companies: Significant differences between community and company accounts led to the Initiative announcing a delegation visit to Brazil. It was also clear there were different perspectives and the founders tried to ensure that rather than community participants representing their communities, that they related their experiences. The experiences were hugely powerful, challenging and each was also deeply personal. 

Challenges related to credibility and partiality. It is important to avoid ‘capture’, the appearance of ‘capture’ and undue partiality. The Pensions Board and the Council of Ethics achieved this by inviting a broad range of expert and stakeholder attendees to roundtables, and at all times insisting on independence in the Global Tailings Standard and committing to open and freely available data generation. 

Defining an Urgent Disclosure Ask: The ‘ask’ needed to be reasonable for small and large companies, avoid commercially sensitive data, and provide meaningful insights of material relevance for investors and other stakeholders. The Pensions Board and the Council of Ethics addressed this challenge by developing a set of questions in consultation with investors, ICMM, and four mining companies of different sizes. 

Maintaining a distinctive investor lens: There is a wealth of engineering, organisational, and other complexity that intersects in this initiative, and one challenge has been not to become lost or absorbed in this complexity. 

Outline the results, including evaluation of its success against the objectives; were there any adjustments to the forward agenda; were there any insights learned from this project that can be applied more broadly?

  1. Preventing Another Brumadinho by Establishing a Global Standard. The process began in June 2019 and involved convening an international expert panel of seven, and a multi-stakeholder advisory group of 15 people. It involved field visits, public consultation, and in-country consultations in Kazakhstan, China, Chile, Ghana, South Africa, and Australia. The Standard is due to be published in June 2020. The goal was to ensure an implemented Standard that would have prevented Brumadinho. The independent expert panel have confirmed that this would likely have been the case. 
  2. Safety Improved by Tailings Disclosure. In under a year, The Pensions Board and the Council of Ethics have received standardised and full disclosure from 64.9% of the mining industry (by market capitalisation), and responses from 86% of the mining industry by market capitalisation. Through government and company sources the founders know repairs have been made to dams that were long overdue and safety budgets increased.  
  3. Transparency driving best practice: The Pensions Board and the Council of Ethics supported the development of the Global Portal in an open-source format, mapped onto satellite imagery, and to allow comparative analysis. Data on 1,938 tailings facilities is reported, located at 764 mine sites, across 98 mining companies. This was the first time such data was freely available and allowed risk profiling of companies. 

Insights

  • Broad requests for detailed information from investors can be successful in a short timeframe, particularly when momentum is built through collaboration.
  • Value in building coalitions with like-minded organisations in and outside the financial ecosystem. These collaborations can be useful both as ‘top down’ (through co-convening a standard setting process), and ‘bottom up’ interventions (through collaboration that enhances the availability and usability of data for academic analysis).
  • If a project has ambitious goals, one intervention will not be sufficient, particularly where the challenges straddle different domains: regulation, governance, corporate practice, employee behaviour, data availability, etc.
  • Investors are in a unique position to convene other stakeholders to address systemic issues. 

Shortlist

Engaging ICT companies to better protect children from sexual exploitation online
Christian Brothers Investment Services

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

Christian Brothers Investment Services (CBIS) launched a multi-year project in 2016 to build a diverse coalition of investors and experts to convince Electronic Service Providers (ESPs) and related technology companies to better identify, disrupt and prevent child sexual grooming and abuse on the Internet. CBIS’s ultimate goal was to challenge tech companies to bring their best thinking to a problem that did not have enough attention focused on it —a problem that is almost doubling annually and is overwhelmingly connected to the ICT sector. 

CBIS chose to focus on child sexual exploitation online (CSEO) because: 

  • It has a history of engaging on human and sex trafficking issues. 
  • Investors ranked CSEO as a top concern. 
  • CBIS has a history of engaging companies on children’s rights. 
  • ICT companies have become some of the firm’s largest holdings. 

The initiative concentrated on several core strategies: 

  • Convincing companies to disclose their preventive measures against child pornography. 
  • Analysing company practices, child technology use trends, NGO expert recommendations, and law enforcement needs. 
  • Encouraging companies to focus on user education (for children, teens, caregivers and educators) about the risks of CSEO and solutions to prevent it. 
  • Educating investors on this threat, and how CSEO connects with the business models of ICT companies in their portfolios. 
  • Determining roles for investors and supporting legislation to prevent CSEO. 
  • Launching an Investor Expectations guide to benchmark leading and lagging performance against expectations and providing guidance for investors for their own stewardship involvement. 

After months of interviewing companies, law enforcement agencies and issue experts, CBIS narrowed engagements to five key areas: 

  1. Public disclosure and metrics around prevention/solutions/progress. 
  2. Partnerships with NGOs, peers, trade associations and others to share lessons learned and share costs of new methods of prevention. 
  3. Investments in new tools, including Artificial Intelligence and Machine Learning, to re-think how exploitation can be identified and shut down—including on end-to-end encrypted systems. 
  4. Assessment of companies’ lobbying and regulatory efforts for increased risks to children from online exploitation. 
  5. Company education on what CSEO is, how to recognise signs, and how to empower children to prevent it. 

Describe how your project is aligned to Active Ownership 2.0, including: 

a. The significance of the systemic, real world outcomes it seeks. 

In 2019, there were 69.1 million images and videos of child sex abuse and exploitation reported to the US national hotline alone (National Center for Missing and Exploited Children, or NCMEC).  

That number had doubled from 2017 to 2018, and again from 2018 to 2019. Child sexual exploitation over the Internet has increased by well over 10,000% since 2004.  

And the number of children potentially impacted is surging too, as many children are now born as “digital natives” and one-third of Internet users globally are children. Add to that fact that over 800 million children are now on social media, and platforms like YouTube upload 500 hours of content every second—it was simple enough to show that many companies have built communications platforms with inadequate user safeguards, minimal content moderation, and unclear enforcement of company policies around what is not allowed.  

The tougher challenge was to convince investors of the material financial impacts that can arise from not getting in top of this issue. An example was the advertising boycott that ensued at YouTube in 2019 after paedophile commentary was found under regular family videos and images of children. 

Other trends CBIS could link to increased risks to children were some of the very technologies and innovations that many investors were anticipating: 

  • the Internet moving to 5G speeds
  • the cost reductions in smart phones over time 
  • cheap and big data cloud storage 
  • and the move to encrypted apps and mobile devices with better cameras and video quality. 

CBIS also recognised that, in addition to making progress on identifying and reducing child sex abuse online, companies could use related tools to address many other content ills—from live mass killings to cyber bullying and suicide videos, to terrorist recruitment of youth and other risks to children. 

The COVID-19 pandemic then emerged, and further escalated many risks to children online from exploitation: 180 countries sent school children home and predators increasingly looked for children to connect with while many were unsupervised on their electronic devices. 

b. The ambition, ingenuity or effort in the responsible investment tools/activities that were deployed. 

CBIS used the following techniques as a way to better understand how child sexual exploitation was growing online: 

  • CBIS interviewed law enforcement and Intelligence officials in multiple countries. This included a day spent with the Chicago Police Department’s Child Cybercrimes Unit to understand how they identify child sex crimes and track down victims and offenders. It was found that reporting hotlines, social agencies and regional police are significantly under-resourced when it comes to investigating multi-country crimes. 
  • CBIS organised an Advisory Committee, of half investors and half child protection experts, to develop and draft the Investor Expectations document.  
  • CBIS spoke at a number of conferences and investor network meetings from 2017-2020, attended world summits with leading CSEO experts, organised webinars for PRI signatories and met with foundations funding this work.  
  • CBIS travelled to the UK to organise an Investor Briefing on the subject at the House of Lords. It invited NGOs, CSEO hotlines, institutional investors, and government officials to the meeting to share viewpoints and needs in protecting children and reporting cases of CSEO.

c. The challenges associated with this initiative (e.g. free rider issues hindering first movers) how these were overcome, and what was learned. 

Challenges included: 

Investor squeamishness: some investors did not have the appetite to hear for very long about egregious sexual harms and crimes against children on the Internet.  

  • Solution: CBIS warned audiences at the start of the process and used language and terms that could describe the risks without going into specific details.  

Privacy and freedom of expression: The requests investors made of companies to prevent child exploitation online had consequences for privacy, freedom of expression, and the profiling of users.  

  • Solution: CBIS worked with the Investor Alliance for Human Rights, the NGO and foundation community, and the UN to organise a series of talks and Roundtable meetings to work through these issues. That work is still in progress for 2020, as these initial meetings are being planned. 

Lack of corporate disclosure on the issue: When CBIS began building a coalition on CSEO there was little company discussion or clear policies on child exploitation prevention, much less TCFD-like detailed reporting and analysis. CSEO was also an issue that no ESG data provider covered. And it was so specific that standardised metrics could not be found. 

  • Solution: CBIS worked with companies and expert NGOs to create quantifiable metrics that focus on impacts rather than process. It asks companies to show how they have reduced the number of children at risk from exploitation, and they can measure that progress internally.  

The fast growth of CSEO: The issue was growing so quickly and had such consequences for children over their entire lives that CBIS needed to encourage direct action, fast.  

  • Solution: CBIS asked companies to show not just how many moderators they had, or how much they donated to a group, but instead to show how the company had directly saved lives and stopped predators from reaching children in the first place. CBIS believe this approach has energised corporate staff into thinking about how they can make a tangible difference.  

Outline the results, including evaluation of its success against the objectives; were there any adjustments to the forward agenda; were there any insights learned from this project that can be applied more broadly? 

While CBIS has seen progress on several fronts, much work remains to build and mobilise a stronger coalition of investors. CBIS has built solid sources of data among subject matter experts and has a core Working Group of 50 investors across borders that are interested in acting.  

CBIS is finalising the Investor Expectations guide and believes it will be useful in raising concerns with companies of different sizes. It will educate investors on new risks from their ICT holdings and it will draw attention to practices needed to protect children online. 

CBIS saw progress from the companies it targeted between 2017 and 2020, including: 

  • Apple Corporation improved its App Developer guidelines, removed apps from its App Store, and reported companies to authorities, if the app was found to be facilitating trafficking or CSEO. Apple subsequently removed several apps because of this risk. In 2019, Apple revised user policies to indicate it was pre-scanning user materials to identify child sex abuse imagery.
  • Facebook launched a CSEO video detection tool, sharing it with others for free. It announced a move to encrypted platforms and launched a multi-year plan to detect grooming and child sex abuse. 
  • YouTube announced restrictions on users’ abilities to post comments on children’s videos after some innocent family postings received millions of likes by paedophiles, driving users to specific images. YouTube removed hundreds of accounts for such abuses. 
  • Verizon and ATT agreed to implement child rights and risk impact assessments across their entire businesses. Both recently launched internal Online Safety Committees and now report to their boards on online safety and child exploitation issues. Both agreed to roll out user education to customers, including through retail stores. 

Five further companies CBIS engaged now produce, or are finalising, metrics related to CSEO prevention. In addition, CBIS led training of UNICEF staff globally on shareholder engagement and how investors make the business case for reducing CSEO risks to children and companies. 

In recent months, CBIS has engaged companies directly, and helped negotiate actions to enable child protection experts to join future dialogues. It has drafted and filed the first resolutions ever focused on the issue. 

Responsible tax engagement
Engagement International and the Municipality of Aarhus, Denmark

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

Engagement International partnered with the Danish city of Aarhus in June 2018 to develop a collaborative, multi-phase engagement project to address corporate tax avoidance in investment and procurement. Aarhus, along with 12 other Danish cities, is a signatory to the Charter for Tax-Haven-Free Municipalities developed by the NGO Oxfam IBIS. The Charter calls for municipal asset owners to avoid investing in and procuring from companies that are registered in tax havens. 

When it comes to dealing with corporate tax avoidance, city governance face a challenge in that they only have a binary option: divesting or investing in companies, and excluding or including suppliers. There are no alternative tools to drive positive and long-lasting changes in companies and society at large. 

The scope of the engagement project was designed to cover both investment and procurement, with two phases: 

  • Phase 1, from June 2018 to May 2020, was a pilot engagement project and is the subject of this year’s PRI award. 
  • Phase 2  began in May 2020 and is a period of expanded engagement, which is still in progress. 

Phase 1, objectives: 

  1. Support asset owners through active ownership to encourage portfolio companies to treat tax avoidance not just as a compliance issue, but also an ESG issue. 
  2. Develop a milestone-based engagement assessment framework on the management level of responsible tax with reference to international guidelines and best practices, and in consultation with stakeholders. 
  3. Apply the assessment framework to the 10 listed companies from the MSCI World Index that were found in Aarhus’ investment portfolios and top 100 suppliers. These companies have the greatest number and severity of corporate tax controversies according to MSCI ESG Research in the pilot engagement. 
  4. Engage with and recommend the selected companies to adopt responsible tax strategies and to ensure that effective governance and management measures are in place. 
  5. Adjust the assessment framework and engagement model based on insights collected to inform the development of expanded engagement in Phase 2, where additional tools to promote responsible procurement will be developed. 

Describe how your project is aligned to Active Ownership 2.0, including:  

a. The significance of the systemic, real world outcomes it seeks. 

The business case for institutional investors to engage with companies on aggressive tax planning is well documented in PRI’s engagement guidance, published in 2015. Aggressive tax planning can pose earnings risks, governance problems, reputational risks and brand value damage to listed companies. On an international scale, this can also lead to macroeconomic and societal distortions. 

Below are two particular aspects of tax avoidance that demonstrate how systemic and widespread the negative impacts can be: 

ONE: It can erode governments’ tax revenue and make them less able to finance essential services, crisis response, and the Sustainable Development Goals. For example:  

  • According to a study quoted by the IMF, annual loss of corporate tax revenue due to the use of tax havens was estimated to be between $500 and $600 billion, of which $200 billion was from low-income economies.  
  • Further, the impact of tax avoidance can be exacerbated by sudden global crisis such as the COVID-19 outbreak. While governments around the world are in urgent financial need to mitigate the health and economic damages of the pandemic, tax revenue is expected to shrink due to the crisis.  
  • At the same time, governments can be caught in the dilemma of providing state aid to businesses that have historically adopted aggressive tax planning strategies. 

TWO:  It can encourage unfair competition between companies and countries. For example:   

  • Instead of competing against other companies on business model, product quality, operational efficiency etc., companies may focus instead on aggressive tax planning. They may be able to obtain higher earnings without allocating as many resources to manage the business as their competitors.  
  • Similar unhealthy competition can happen between countries offering ultra-low or even zero corporate income tax rates and those with more average tax rates. 

b. The ambition, ingenuity or effort in the responsible investment tools/activities that were deployed. 

The Responsible Tax Engagement project is a concrete solution for institutional investors to bridge the gap between knowledge and practice in promoting responsible tax through active ownership. 

The challenge for institutional investors is to find a way to evaluate and measure portfolio companies’ progress towards implementing responsible tax strategies.  

Building on its expertise and experience in engaging on other systemic ESG issues, Engagement International has come up with a robust methodology grounded in the widely accepted international guidelines and best practices. 

The assessment framework includes five milestones, namely: 

  1. Recognition and Commitment 
  2. Strategies 
  3. Risk Management and Governance 
  4. Performance 
  5. Transparency. 

This systematic approach means institutional investors can assess companies across the same criteria, and lets them compare the same company’s performance over time, as well as undertake inter-company comparisons within the same sector or portfolio. 

c. The challenges associated with this initiative (e.g. free rider issues hindering first movers) how these were overcome, and what was learned. 

The main challenges for Phase 1 of the Responsible Tax Engagement project were: 

  • Designing an appropriate engagement and assessment model on responsible tax while recognising that taxation is in itself a complex, political and sensitive subject.
  • Understanding companies’ tax affairs including the amount of tax payment and to what extent it reflects its tax strategies where disclosures may be limited. 
  • Limited or nil response from selected companies. 

To overcome these challenges: 

  • The City of Aarhus and the Danish Ethical Trading Initiative hosted a series of multi-stakeholder workshops in October 2018 and January 2019. Over 100 municipal asset owners attended, as well as subject matter experts from academic, business and non-profit sectors. They exchanged ideas on corporate tax avoidance, especially the use of tax havens, and how investors could influence portfolio companies to properly address such a systemic issue. After the workshops, the draft assessment framework was fine-tuned and another round of consultation with investors, academics, NGOs and leading companies in responsible tax was conducted to review its usability and robustness. 
  • The companies’ effective tax rates, calculated by various methods, were reviewed and compared. In particular, the ETR based on actual tax payment was compared with the estimated statutory tax rate, calculated by MSCI ESG Research.  
  • Engagement International has a stepped approach to escalate engagement with non-responsive companies. Possible actions include direct engagement with top executives and the board, proxy voting, engagement in the public domain etc.  

Outline the results, including evaluation of its success against the objectives; were there any adjustments to the forward agenda; were there any insights learned from this project that can be applied more broadly? 

The organisation has so far engaged with 10 listed companies: Alphabet (Google), Apple, Amazon, Microsoft, Credit Suisse, Deutsche Bank, Societe Generale, UBS, Procter & Gamble, and Royal Dutch Shell. And seven companies have responded.  

Less responsive companies were concentrated in the US, an observation similar to PRI’s experience of collaborative engagement on tax that ran between 2017 and 2019. Additional stewardship tools and/or escalated engagement will be further considered when engaging with non-responsive companies during Phase 2. 

A baseline assessment was established for all 10 companies to measure a future engagement progress. Most of the companies do not currently exhibit adequate management efforts across the five milestones. However, some more proactive companies have undertaken notable initiatives to improve preparedness and transparency. 

It has been observed that both investors and companies now perceive tax avoidance more as a systemic ESG issue than a mere compliance matter. This presents an excellent opportunity for investors to enter into dialogue with companies to further promote the adoption of responsible tax strategies. 

Encouraged by the overall positive outcome of Phase 1, the organisation has identified another 20 companies from the MSCI World Index with which to engage. Phase 2 (May 2020 onwards) will involve more refined criteria that cover tax controversies, presence in tax havens and effective tax rates. The goal is to have more interested investors on board to strengthen the collaborative engagement with more companies. 

Municipal investors are sometimes more exposed to corporate tax avoidance than other institutions. This is because their procurement expenditures on controversial listed companies can be much higher than their existing investment in them.  

One of the goals of the expanded engagement in Phase 2 is therefore to transfer the knowledge gained in developing the engagement assessment framework to design a questionnaire that municipal, or any institutional investors, can use internally to survey their significant suppliers’ level of responsible tax management. 

AI ethics and data governance
EOS at Federated Hermes

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

EOS at Federated Hermes (EOS) launched a combined thought leadership and public advocacy project in 2019 that aimed to help companies better understand the risks associated with artificial intelligence (AI) and data governance. The firm has created frameworks and tools that investors can use to address issues around freedom of speech, supply chains, data privacy, surveillance, user manipulation, bias and discrimination. 

The cloud computing and analytics services offered by Big Tech companies such as 

Alphabet (Google’s holding company), Facebook, Amazon, Microsoft and IBM can be incredibly useful for companies that want to use Big Data to profile their client base, develop predictive analytics and customise their services. However, a lack of awareness of the potential inherent biases in the data or analytical modelling, can lead to accusations of discrimination and unfair outcomes. Examples include the fine levied on Liberty Mutual1 in the UK over its complaints procedure, and accusations of gender discrimination levelled at Goldman Sachs as a result of a credit card algorithm, which it denied.2 

EOS’s objective was to make companies aware of the risks related to privacy, bias and discrimination when using AI, and then to develop a risk‐aware culture at different levels within a firm. EOS has built its engagement strategy around two white papers: 

1. Investors’ Expectations on Responsible Artificial Intelligence and Data Governance was published in April 2019, in conjunction with law firm Bryan Cave Leighton Paisner (BCLP), and addresses concerns from a legal and compliance, and a technical perspective. 

2. Artificial Intelligence Applications in Financial Services was published in December 2019, in conjunction with Oliver Wyman, Marsh and BCLP, and addresses issues that affect asset managers, banks and insurers. 

Describe how your project is aligned to Active Ownership 2.0, including: 

a. The significance of the systemic, real‐world outcomes it seeks. 

EOS wants to help companies become more transparent in how they use Big Data and machine learning. It expects companies to commit to overseeing the respect of all human rights and to publish AI principles, applicable use cases and white papers that highlight their challenges and limitations. For example, Google’s white papers on AI and on Disinformation are positive first steps. Although the material social issues may differ from sector to sector, the right to privacy, life, and equality and non‐discrimination will always apply, as these are fundamental human rights. The example of Alphabet raises a number of issues: 

  • Right to Privacy:  Through its technologies and relationships, Alphabet currently collects sensitive personal data, which may include health, biometric, and real‐time location tracking. It deploys listening features on Google Home products, which was not disclosed when this was launched. Also, under Project Nightingale, which was revealed by a whistleblower and widely reported in the media in November 20193, Google allegedly collected the personal medical data of up to 50 million Americans from one of the largest healthcare providers in the US, without informing patients. This reportedly included individual names and medical histories, which could be accessed by Google staff. The allegation raises urgent questions about privacy, due process, and the civil rights of billions of individuals. 
  • Right to Political Participation: While Google has sought to limit microtargeting of political advertising, which risks the manipulation of specific groups or individuals, and sought to limit the spread of disinformation, political advertisers can still target using age, gender and area code. 
  • Right to Freedom of Opinion, Expression, and Information: The right to freedom of information is jeopardised by micro‐targeting and profiling, with no transparency on the algorithm that puts people into targeted buckets. 
  • Right to Health: Multiple sources have documented health and safety impacts on YouTube content moderators, especially mental health issuesarising from their work. 
  • Right to Equality & Non‐Discrimination, Right to Life & Security: YouTube was used to share scenes of the New Zealand mosque massacre in 2019. At present, the proliferation of hate speech and acts of violence still appear to occur on the platform.  

b. The ambition, ingenuity or effort in the responsible investment tools/activities that were deployed. 

EOS has engaged with 60 companies across the tech, banking and pharmaceutical sectors in the US, Europe and Asia. This included sending letters to companies outlining its concerns and requesting further information on their approach to AI and data governance risks. The firm also conducted an initial benchmarking of the management performance at banks on AI/data governance. 

In 2019 EOS escalated its engagement at Alphabet, supporting a shareholder proposal calling for the establishment of a societal risk oversight committee, and speaking at its annual shareholder meeting, where the firm called for board directors to answer to shareholders. 

Following the 2019 AGM, EOS stepped up the pressure on Alphabet. 

Despite product‐level improvements, EOS still believes the company falls short on governance oversight on human rights‐related matters concerning the use of AI, including its overarching strategy on government‐related contracts and operations in non-democratic markets. 

In November 2019, the firm sent a private letter to Alphabet signed by over 80 institutional investors representing nearly $10 trillion in assets under management and advice, raising concerns about the company’s lack of responsiveness on ESG-related issues and requesting a dialogue with Alphabet on human rights‐related issues. 

EOS was a co‐lead filer with three other institutional investors who put together a shareholder proposal for Alphabet’s 2020 AGM. The proposal called for the establishment of a Human Rights Risk Oversight Committee to help anticipate and oversee management of the adverse human rights, and societal risks and impacts, associated with Alphabet’s technologies. With approximately 53% of Alphabet’s voting shares controlled by the company’s executive officers and board members, 16% support for the resolution translates to roughly 45% of the independent votes.  

EOS has also carried out public policy and market best practice engagement, including: 

  • June 2019: presented at the Institute of Business Ethics on AI ethics 
  • July 2019: participated in a meeting with the OECD and Thun Group on AI and human rights in Geneva 
  • Sept 2019: HSBC invitation to speak on AI ethics. HSBC published its principles in February 2020. 
  • Feb 2020: PRI London Forum 
  • April 2020: contributed to ShareAction publication on responsible AI 
  • May 2020: UK All‐Party Parliamentary evidence session on corporate decision‐making and investment using AI 

Subsequent to this project being reviewed as part of the PRI Awards 2020:  

  • August 2020: Moody’s seminar on AI and fintech 
  • September 2020: All-Parliamentary Group Corporate Responsibility Meeting on Responsible approach to AI. This discussed how data assets and predictive analytics are changing the way society functions. It explored ideas ranging from regulation to taxation, and raised awareness of supply chain issues given the concentration of cloud providers, plus the impact of AI on the most vulnerable segments of population.  

c. The challenges associated with this initiative (e.g. free rider issues hindering first movers) how these were overcome, and what was learned. 

The first challenge was to develop a foundational understanding of the long‐term sustainability issues relating to AI and data governance, and then translate this into an actionable engagement agenda. 

EOS at Federated Hermes tackled this challenge by publishing the two reports mentioned above. It placed particular emphasis on the connection between AI ethics and the impact on human rights ‐ to help foster wider acceptance and understanding by stakeholders. 

Challenges also remain in ranking the leadership of companies with trusted AI applications beyond the technology sector, as brand value is closely connected to product offering, customer services and other factors. 

EOS developed a multi‐criteria appraisal system for scoring technology companies’ approach to AI and ethics, which can be used as an input to ESG integration, as well as monitoring the progress of engagement on this topic at individual companies. 

Subsequent to this project being reviewed as part of the PRI Awards 2020: 

In September 2020, EOS published the trusted AI assessment framework. This is a ‘three lines of defence’ model that it recommends to companies for trusted AI implementation. Each category of the assessment is mapped to the principles and analytical framework (legal and financial factor analysis, and salient social impact analysis) that EOS highlighted in the April 2019 paper. 

Outline the results, including evaluation of its success against the objectives; were there any adjustments to the forward agenda; were there any insights learned from this project that can be applied more broadly? 

Subsequent to engagement by EOS: 

  • Alphabet has made improvements in AI governance at the operational and product levels. (Although EOS continues to press for improvements at the oversight level.) 
  • Facebook has established a safety advisory board. 
  • Chinese insurance firm, Ping An, became one of the first major financial institutions globally to publish a set of AI ethical principles. 

In addition to these successes, a European conglomerate sought EOS’s guidance on its AI ethics approach, and the board chairs of two other European financial conglomerates responded to EOS’s letters, detailing the progress made within their companies on AI ethics and data governance. 

EOS has also expanded its engagement targets to go beyond financial services and cover healthcare and consumer companies, with positive feedback and insights gained from those engagements. 

Votes against slavery: engaging with FTSE 350 companies failing to comply with section 54 of the Modern Slavery Act 2015
Rathbone Brothers and a coalition of supporters

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

Rathbones has launched an initiative that uses shareholder action to eradicate the scourge of modern slavery from the supply chains of some of the world’s biggest companies.  

The firm was driven to act after it became clear that, despite good intentions, Section 54 of the 2015 Modern Slavery Act made no provision for legal enforcement. Rathbones felt that, in the absence of enforcement, pressure could instead be brought to bear on laggard companies via direct action from investors. Namely, threatening to vote against the annual reports and accounts of companies that don’t comply.  

It sought and gained support from 20 investors, with £3.2 trillion assets under management, to challenge FTSE 350 companies that had failed to meet the reporting requirements of the act. The aim was to drive full compliance to the act from a target list of 23 laggard companies – identified with the support of a leading NGO.   

The initiative also serves as an opportunity for investors to better understand the nature of the businesses they are investing in, and to evaluate board responses to the issue of modern slavery.  

A secondary objective was to encourage investors to challenge their portfolio companies more on social issues. Environmental issues very often take the fore in terms of shareholder resolutions and AGM statements, but Rathbones’ engagement group felt that social issues should merit similar levels of attention and use of shareholder powers. 

Rathbones began its challenge by inviting PRI Members to sign and support engagement letters that were sent to the boards of the 23 target companies. It then added a second layer of engagement by threatening to abstain its vote on the approval of the annual report and accounts of non-compliant companies at the time of their AGM.  

The initial plan was to attend the AGMs of non-compliant businesses that had failed to respond, but this aspect of the project was curtailed by the current CV-19 pandemic. 

Describe how your project is aligned to Active Ownership 2.0, including: a. The significance of the systemic, real world outcomes it seeks. 

The initiative covers all the main aspects of Active Ownership 2.0 – namely a focus on outcomes, common goals and collaborative action. The theory of change is clear: use votes on companies’ reports and accounts to accelerate compliance with the Modern Slavery Act. 

This project is not just about making change at individual laggard companies. It’s much bigger than that. It’s about addressing a massive structural social issue that affects the whole economy. Slavery is an illicit trade, worth $150 billion, involving approximately 40.3 million people across all sectors and industries. Better reporting on this challenging area is another vital outcome, of benefit to all system participants.  

The key message communicated to target companies was to consider modern slavery reporting to be an annual process to improve best practice, not a one-time box ticking approach. Success depends on making the companies aware of how seriously investors take the issue.  

Despite the current pandemic, the collaborative approach and work of the signatories and the Business & Human Right Resource Centre (BHRRC) has meant a constant line of communication on this issue, reinforcing the success of company dialogue and improving the rigour of the process. 

b. The ambition, ingenuity or effort in the responsible investment tools/activities that were deployed. 

The project is unique in two ways: 

  • Firstly, it calls on members to use their strongest power of censure: voting against the report and accounts, which is an aspect of stewardship that is under-used.  
  • Secondly, Rathbones worked with a trusted NGO partner closely linked to the UK Home office to develop a bespoke methodology and matrix for assessing compliance. It believes it is the first investor coalition to focus so clearly on general AGM voting on a social risk. 

Once BHRRC and Rathbones had compiled its target list of 23 FTSE350 laggards, it set about contacting each company. Some were better responders than others but, working alongside its investor partners, Rathbones was eventually able to reach senior management in the handful of companies that had initially proved hard to track down. The total size of the investor-base, and its persistence, has produced results in companies with very difficult track records for investment engagement, such as Carnival and Sports Direct. 

The initiative has shown that investors wield greater power than they realise by focusing on standard AGM outcomes. Rathbones could have taken the approach of co-filing resolutions at the target companies, but this would have taken far, far longer and required much time and effort. Instead, it made creative use of its existing powers, which in turn highlighted that ESG risks are not ‘special interests’ for special resolutions, but are instead fundamental to a company’s licence to operate. That’s why Rathbones focused on opposing or abstaining the annual report and accounts to express its concern. 

c. The challenges associated with this initiative (e.g. free rider issues hindering first movers) how these were overcome, and what was learned. 

The main challenge in was in convincing other investors of the necessity of voting against the non-compliant companies. The theory of change was that investors must make full use of their stewardship tools, or face losing them. The final group of twenty are committed to this step. In addition to this were four further challenges: 

  1. The CV-19 pandemic has meant requests have not been prioritised and companies have been slow to respond. Several companies with exposed supply chains have been badly hit. A few companies have furloughed the staff member responsible for reporting. Although Rathbones and its investor partners appreciate the need to tread carefully and be sympathetic, they have discussed what happens if the company is still non-compliant at the end of the year.  
  2. The pandemic has also curtailed the final phase, as Rathbones had planned to attend AGMs of compliant companies to congratulate and challenge management to go further and, similarly, to draw attention to the issue at non-complaint companies. 
  3. There is no deadline for companies to report their modern slavery statement, as long as it is done every year and covers the previous reporting year. A clearer reporting system when companies are due to release modern slavery statements (which frequently coincides with their new financial statements) would be helpful, and create an easy point of comparison in future. 
  4. The final challenge is to make sure that companies truly care about eliminating the modern slavery, not just in producing better reports. That’s why Rathbones plans to repeat the initiative in multiple years. 

Outline the results, including evaluation of its success against the objectives; were there any adjustments to the forward agenda; were there any insights learned from this project that can be applied more broadly? 

Of 23 companies in the FTSE350 identified as non-complaint, as at 1st May 2020, 16 companies have become compliant as a direct result of engagement. This is a ‘hit’ rate of 69%. Rathbones is still talking to the remaining seven non-compliant companies and have given them some leeway on compliance. A number of these businesses are in hospitality and retail and have been acutely affected by the CV-19 pandemic. Rathbones anticipates full compliance by October 2020. 

The key feature of this engagement is its speed and tangible results. Some companies responded within days, whereas most engagement collaborations take months. The focus on the adoption of the annual report and accounts has shown senior management that modern slavery is a very serious issue. 

In addition, the companies responding well are not the ‘usual’ names. There are companies who have been managing human rights risks more generally for years, and who always seem to come top of industry benchmarks. Rathbones’ initiative shone a light on companies that have massive global supply chains, but fly under the radar. By doing so it underlined the importance of orchestrating a systemic response to a systemic problem – no company can eradicate modern slavery risk on its own. 

Finally, by focusing on a specific, measurable aspect of legal compliance with a clear and very public outcome for failure, the initiative not only attracted immense AUM support from investors, but also saw an impressive response from target companies. This successful engagement on reporting opens up doors with some of the more difficult companies to talk about the more important issue of performance in actually reducing modern slavery – all set within the crucial context of shared trust and history with the target companies. 

ESG research report of the year 

Winner

2020 ESG Trends project: what are the big challenges for the new decade?
MSCI

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

To mark the beginning of the new decade, MSCI ESG Research undertook an ambitious project entitled “2020 ESG Trends project: What are the big challenges for the new decade?” It identified 10 challenges MSCI felt would leave an impression on the investment landscape throughout the new decade. 

The project pioneered a new digital approach to showcasing thousands of ESG data points in an interactive way. The project is an extension of the 2020 ESG Trends report that MSCI ESG Research published over the past eight years.  

The report differs from previous research in that: 

  • The project goes beyond a traditional research ‘report’, bringing to life thousands of ESG data points in interactive form to showcase how ESG factors were useful in explaining the decade investors are likely to face. It used MCSI ESG Research’s ESG ratings, ESG metrics, screening, Sustainable Development Goals (SDGs), climate and controversies datasets of nearly 14,000 listed issuers.
  • The innovative use of alternative datasets (i.e. data not disclosed by the companies rated) to unearth emerging risks or trends relevant to investors – and expose the companies leading or lagging in their efforts to respond to the challenge (for example MSCI used alternative datasets to identify the companies who have pledge to support an SDG but have also experience a controversy associated with the goal).
  • The ability of the campaign to reach and educate investors globally of the value of using ESG data in examining macroeconomic or investor-relevant themes such as climate change, antibiotic resistance, deforestation and the growth of ESG regulation, to name a few of the topics the 10 questions explored. 

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

MSCI posed 10 questions: 

Q1: Who will lead the race to cut carbon? (Feb 3) 

We used countries’ Nationally Determined Contributions and distilled them into a comparative map to show possible reductions in global emissions. Countries were colour-coded to reflect climate ambition as determined by estimating the percentage reduction in 2030 GHG emissions per capita from each country’s BAU scenario against its NDC. 

Q2: What if antibiotics stop working? (Feb 10) 

MSCI compared research funding for antimicrobial resistance with other major diseases. The data showed the market disconnect between funding and possible fatalities, especially with regards to antibiotic resistance. The data also summarised companies addressing the issue. 

Q3: What if public companies stay privately controlled? (Feb 18) 

MSCI plotted how companies used different control-skew mechanisms (e.g. multiple share classes) to retain control and limit the power of shareholders. 

Q4: What if we can’t balance people and planet? (Feb 24) 

MSCI examined how the world’s growing demand for cleantech could pose new ESG risks for investors in metal and mining companies, some of which were already facing human rights and environmental controversies. 

Q5: What if ESG risks transcend politics? (Mar 2) 

MSCI looked at how various ESG factors differed for companies located in states that voted for Trump or Clinton in the 2016 U.S. presidential election. 

Q6: What if gender parity is out of reach for corporate boards? (Mar 9) 

To mark International Women’s Day, MSCI used scenario analysis to chart the timeline to get to gender parity on boards. 

Q7: Who will regulate ESG? (Mar 16) 

MSCI detailed all the ESG regulations that have come to the market in the last decade, who implemented them and who they affected. 

Q8:  What if we cut down all the forests? (Mar 23) 

MSCI used a logistics map to show the supply chains of major producers and buyers of palm oil, one of the main drivers of deforestation. 

Q9: What if ESG disclosures become standardized? (Mar 30) 

MSCI displayed all the company disclosed and alternative data used to determine an MSCI ESG Rating for an individual company. 

Q10: Who cares about the UN Sustainable Development Goals? (Apr 6) 

MSCI looked at companies that did not publicly disclose support for an SDG but had products or services aligned with the goal; and the percentage of companies that had committed to an SDG but had also been involved in a serious controversy in the same area. 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

While each chart focused on a different challenge, as outlined above, in totality the research aimed to answer four fundamental questions investors will need to answer in the decade to come: 

  1. How will climate change affect the world?  
  2. How will pandemics shape the healthcare industry?  
  3. How do markets and people combine to change how companies are run?  
  4. What will happen to the world of ESG as regulations and disclosure mature? 

In order for asset owners and the financial system accurately to address these new risks and opportunities, they first need to visualise how each might change their portfolio and the companies held within. These charts bring to life that need, and create a new way to interact and engage with data that could shape the future of the market. 

The number of views of the charts is still growing but, as at 12 May 2020, the project had generated over 16,000 views to the 10 questions webpage, mainly from institutional investor audiences, and 100,000 social media impressions. The charts also generated media interest:  

  • The climate map ‘Who will lead the race to cut carbon?’ was featured in the FT’s Moral Money newsletter.
  • The gender parity chart ‘What if gender parity is out of reach for corporate boards?’ was featured in The Telegraph: Most workers don’t know what the gender pay gap is. 
  • Five of the charts features on Chinese media site Sina Finance. 
  • The 10 charts were promoted via the MSCI ESG Now Podcasts available on Spotify, Apple, Google and Stitcher. 

MSCI has received positive feedback from prominent clients including a large US asset manager and well-known French corporate pension fund. 

Shortlist

The Coller FAIRR Climate Risk Tool
FAIRR Initiative

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research 

Global investors are increasingly able to quantify climate risk in high-emitting sectors like energy, transport and utilities, but there is a gaping hole on climate risk for the global meat industry. An industry that is responsible for 15% of global greenhouse gas emissions and which shows low levels of climate disclosure and governance. 

The meat industry’s poor climate reporting has until now made it impossible for investors to measure and manage its climate risk. For example, research for the Coller FAIRR Climate Risk Tool found that only 5% of leading meat companies have undertaken a climate scenario analysis, compared to at least 23% of oil and gas, mining and utilities companies. 

The aim of the Coller FAIRR Climate Risk Tool is to remove this roadblock and to enable investors to quantify climate risk in the meat sector. 

FAIRR’s tool originally carried out a TCFD-linked scenario analysis for 35 leading meat producers. This enabled investors, for the first time, to assess the potential downside risks and upside opportunities related to animal protein companies in a two-degree world in 2050.  

Another point of difference from any research that has gone before in this sector is that the Coller FAIRR Climate Risk Tool is an online research tool where investors can input their own company data to calculate impacts on profitability. Thus its universe is not restricted to the now 41 companies covered by FAIRR’s work. 

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

The tool is based on scenario analysis, as recommended by TCFD, based on data from IEA ETP, WEO and the IPCC reports, combining scientific research on emissions pathways that would lead – with a likelihood of 66% - to a global warming potential of 2°C. The methodology also takes into account public policy scenarios from the PRI’s Inevitable Policy Response. 

As an example, the model builds in the likelihood of a large market re-pricing event near 2025, when climate policy is assumed to start affecting the cash flows of companies. The FAIRR Initiative worked with Vivid Economics on this element of the tool. The underlying research also looked at projections of alternative protein sector futures. 

The FAIRR Initiative identified six key risks that will impact the profitability of the meat sector in its scenario analysis:  

  1. The imposition of a CO2 price on meat 
  2. increased energy and electricity costs 
  3. increased feed costs 
  4. increased cattle mortality 
  5. alternative proteins 
  6. increased veterinary and medical costs. 

The model includes the most widely-produced and consumed animal proteins globally (beef, poultry and pork) and focuses on geographies with large meat producers: Brazil, Canada, and the US. Company financial inputs are 2018 figures obtained from databases such as Capital IQ. 

The Tool then identifies three climate pathways that animal protein companies could take, which present downside risk or upside opportunity compared to following a market pathway: 

  • Climate regressive pathway: Company mitigates climate impacts worse than its peers, and does not grow exposure to alternative proteins. 
  • Climate market pathway: Company mitigates climate impacts no better or worse than the overall market, limited exposure to alternative proteins. 
  • Climate progressive pathway: Company mitigates climate impacts better than its peers, and grows alternative proteins faster than market. 

Results depend on how well each company is currently reporting and responding to climate risks. Investors can use the tool to analyse the material impacts of a 2°C temperature rise on 41 leading producers of beef, pork and chicken. Investors can also input their own company data. 

FAIRR worked with over 30 investor analysts and sector experts to develop the model, including representatives from the Oxford Martin Programme on the Future of Food, Chatham House and Imperial College London. In June 2020, an update to the model will be released, to cater for investor feedback and improve functionality 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

With global coverage in publications such as the Financial Times, Bloomberg, Frankfurt Allemagne and Valor Economico (Brazil), the impact and innovation of the Coller FAIRR Climate Risk Tool have been widely recognised since its launch in March 2020. 

FAIRR’s membership includes over 200 investors managing $20 trillion of assets, and Google Analytics data show that the tool is regularly accessed by many of these. Early feedback since March suggests that investors are using the tool both in ESG integration and engagement programmes. 

To illustrate how investors can use the tool, FAIRR undertook a pilot scenario analysis on five animal protein giants (BRF, JBS Maple Leaf, Minerva and Tyson Foods) on its launch. These companies have a combined market capitalization of $50 billion (as of Feb 2020). 

The illustrative scenario, presented by this pilot found that Canadian firm Maple Leaf, could see EBITDA grow by 77% in a climate progressive pathway (versus a baseline pathway) given its significant investments in alternative proteins relative to peers and no exposure to beef. On the other hand, Brazilian beef giant BRF could see EBITDA reduce by 30% (versus a baseline pathway) if they fail to improve market share in alternative proteins and reduce exposure to beef and poultry. 

The tool is being used in two practical ways: 

  1. Risk management: Investors are being made aware that billions of dollars could be at risk, both at large meat producers and for household brands such as McDonalds, Walmart and Burger King.  
  2. Opportunities: The tool also illustrates that companies have the potential to convert downside risk into upside opportunity by taking a climate progressive pathway. This has enormously raised awareness of opportunities for investors to engage with large meat, fish and dairy companies to encourage them to diversify their products into plant-based as well as animal proteins. Among 60 of the largest meat, fish and dairy producers (as analysed by the Coller FAIRR Index), the number investing in plant-based products tripled last year. 

European sustainable funds landscape
Morningstar, Inc.

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

The European Sustainable Fund Landscape paper was written in 2019 as a response to the growing demand for guidance on the complex topic of ESG funds alongside detailed data analysis. The line between traditional and sustainable funds is becoming increasingly blurred, adding confusion to an already complex topic. The report’s aim was to help investors navigate the shifting landscape by grouping sustainable funds into three general types: ESG Focus, Impact, and Sustainable Sector. 

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

The research covered flows, assets, and launches, and encompassed 2,232 open-end and exchange-traded funds domiciled in Europe, as of June 2019. 

The European sustainable funds universe was deemed as those open-end funds and exchange-traded funds domiciled in Europe that, by prospectus, either state that they use ESG criteria as a key part of their security-selection process, or indicate that they pursue a sustainability-related theme, or seek measurable positive impact alongside financial return. 

The fund list required the Sustainability Research team to manually review prospectuses and other legal documents in different languages to ensure correct tagging. 

The paper offered a comprehensive view of the growth of the European sustainable funds universe. It highlighted flows on an asset manager and fund-level, fund launches, repurposed funds (the number of funds that have turned into full-fledged sustainable investment offerings with a new mandate) and the proportion of money allocated to passive in comparison to active. 

In terms of future work, subsequent papers have built upon the fund list and framework captured by the paper, including regular quarterly US, European and global flow reports and landscapes.  

A recent example, European Sustainable Funds Show Resilience During Covid-19 sell-off, demonstrated that, driven by continued investor interest in environmental, social, and governance issues, the European sustainable fund universe pulled in €30bn in the first quarter of 2020. This compares with an outflow of €148 billion for the overall European fund universe. 

The methodology was intended to be clear and the findings have been shared widely to ensure full transparency to a broad audience and range of investors, from professional to retail. 

All of these landscape and flow reports have been extremely well received by the asset management and investor community, as well as the media. In terms of numbers, ESG fund flows for US and Europe represented a large portion of the total Morningstar ESG media coverage last year, earning 300+ media placements as reporters seek out this hard-to-find and inconsistent data to quantify the growing ESG landscape. Research from this team secured 724 media placements and an incredible 182 interviews for Q1 globally. 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

The European Sustainable Funds Landscape formed part of a campaign whose primary markets were the UK, France and Germany (the full campaign was translated for these languages) and secondary markets - Benelux, Italy, Spain, Switzerland and Austria (the campaign entry points were translated into local languages with the remainder of the campaign offered in English, French and German). 

The primary targets of the campaign were portfolio managers, product managers, marketers and distribution within asset management, wealth management, insurances, pensions and institutional investors and advisers. The secondary target focused on individual investors. 

Ultimately, the intermediary community, including advisers, wealth managers and private banks, was a clear benefactor, as the paper was a useful tool to counsel their investor client base and get a heightened understanding of sustainable funds and ESG trends in Europe, using factual evidence and data analysis. 

The data and findings of the paper were shared and discussed at multiple industry conferences and investor forums. Examples include FundForum ESG and Impact in Amsterdam, Sustainable Forum in Luxembourg, Investment Network in London, Private Wealth Forum in Hong Kong, and many other events. 

Coronavirus ESG monitor and dataset
Truvalue Labs

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

Truvalue Labs, a technology company that uses Artificial Intelligence (AI) and Natural Language Processing (NLP) to uncover material ESG information on companies, has created a dataset that allows investors to draw actionable insights from the increasing COVID-19 related information the company is processing through its sourcing of big-data. 

To make sense of this COVID-related information, Truvalue created five new NLP-based signals that specifically related to the global humanitarian crisis at hand: 

  1. Social Impact: Captures discussion of COVID-19 and its impact on the quality of living, access to education, social distancing, mental health, depression, access to healthy food, and related topics.  
  2. Labour: Captures discussion involving COVID-19 and employees, layoffs, working from home, paid sick leave, unemployment, and related topics. 
  3. Economy: Captures any discussion of COVID-19’s impact on the broader economy. 
  4. Supply Chain: Captures discussion involving COVID-19 and supply of goods, production halts, manufacturing stoppages, and other related issues. 
  5. Response: Captures information related to any R&D or efforts to create vaccines or to shift manufacturing to produce test kits, ventilators, sanitizer, or any other unusual, crisis-specific goods, services, or products. 

All of these new signals are assessed with respect to the behaviour and actions taken by individual firms. And the dataset that was constructed from it also aggregates and organises this information by sector, industry, geography, and so on. Truvalue believes it has largely succeeded in the objective of uncovering important insights and trends that are useful for investors facing an unprecedented period of uncertainty. 

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

The methodology primarily uncovers stakeholder perception on the actions of companies through early periods of this recession, as well as important macroeconomic trends observed by organising the data through various facets, such as industry, geography, SASB category, and so forth. The initial report documented evidence of five topics:  

  1. Employee Health and Safety 
  2. Labour Practices 
  3. Access and Affordability 
  4. Product Quality and Safety 
  5. Supply Chain Management.  

It was found that the relative COVID-19 data volume Truvalue captured had peaked in various regions weeks ahead of the peak in new COVID-19 cases. In addition, the firm observed that the overall relative COVID-19 volume it captured had an inverse relationship with US equity prices, which backed up its purpose as an indicator of relative dislocation. 

When assessed by industry or sector, Truvalue found that relative COVID-19 data volume helped to assess what areas of the economy were more stressed, or perhaps better positioned. For example, its second research note focused on the Response Signal, which captured information related to firms that had shifted operations as a result of the global pandemic. Here it found a correlation between industries with strong volume on the Response Signal and year-to-date changes in next twelve-month profit expectations (as measured by consensus broker estimates). 

External research has also validated the usefulness of Truvalue’s new signals and dataset. A report authored by a team at State Street and George Serafeim from Harvard Business School found that firms with positive sentiment on the Labour and Supply Chain signals exhibited higher institutional money flows and less negative returns.  

Separately, a paper by Ola Mahmoud (University of Basel and University of California at Berkley) and Julia Meyer (University of Zurich) made use of the new signals to show evidence that through the recent market crash, US stocks with high ESG performance experience higher stock returns. 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

Truvalue was able to use the new data alongside its SASB dataset for comparative analysis. For example, the data made it possible to differentiate between the perception of firm performance on Employee Health and Safety (a SASB topic issue) with respect to COVID-19 related issues, and the performance of the same company on that same topic but unrelated to COVID-19 specific issues. 

Beyond the academic studies, which have used its new COVID-19 signals, investors have integrated the dataset into their internal systems to help make sense of a chaotic and uncertain social and economic landscape. Here’s how it has helped: 

  • With the ESG overlay on these new signals, investors have been able to assess the commitment of corporations to positive social outcomes, as well as gain insight into the quality of governance teams. 
  • Truvalue’s Research Brief on the Top Responders, which uses the firm’s new COVID-19 Response Signal, has helped investors identify companies that have underappreciated intangible value.  
  • On the fixed income side, the new signals have more specifically been used in the analysis of new issues such as Netflix’s $1bn of new debt issued in late April of 2020. 
  • Many institutional investors have used this data and research to help establish and frame their approaches to ESG analysis during this unprecedented time, as well as to track and monitor economic conditions. They’ve looked to relative volume trends on the Economy and Supply Chain Signals to help systematically understand the pace in which the real economy and certain activities remain disrupted or begin to return to normal. 

For the financial system more broadly, these signals help consistently hold companies to account during a time when the nature of the social contract between firms and stakeholders is fundamentally shifting.  

Both academia and the media have used Truvalue’s dataset to hold companies to account. While the new dataset and research has helped investors, it has also played a small role in creating better societal outcomes. 

Analysis of the impact of an investment portfolio on society and on SDGs
VidaCaixa

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

VidaCaixa has developed an investment approach that aims to rate the impact of its investments on the environment, society and governance, against clearly-defined metrics, as well as to capture the positive contribution of its portfolios to the UN’s Sustainable Development Goals. 

VidaCaixa believes that the SDGs serve as a useful guide to managing risks, both at the macro and micro levels, and constitute a robust framework of investment opportunities for any asset class. 

This project represents a contrast from the firm’s traditional risk-return approach in that it breaks down the portfolio according to SDGs: The higher the percentage of investment that contributes to SDGs, the more aligned it will be with the global sustainability agenda. 

This approach to investment management is a revolution for an institutional investor like VidaCaixa, and marks a new way of understanding the impact of ESG-related issues on portfolio management. 

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

First, VidaCaixa focused on identifying those metrics that were the most representative of the impact of companies on society. One of the main problems that managers face when integrating ESG aspects into investment decision-making is the quality and quantity of information. It’s essential to obtaining homogeneous and comparable data from different companies. VidaCaixa used the following metrics to calculate the impact of different portfolio companies: 

  • CO2 consumption intensity (tCO2-eq / M€ sales) 
  • water consumption intensity (m3 / M€ sales) 
  • percentage of renewable energy generated 
  • percentage of women on the board of directors  
  • investment in innovation (investment in R&D / sales revenue)  
  • and number of controversial incidents. 

The research also focused on measuring the positive contribution of companies to the different SDGs. For this, VidaCaixa used the PRI Market Map. It identified the business lines of the each company and mapped each of them with one of the 169 associated milestones, or SDG targets. It should be noted that not all of them could be mapped, since not all of the business lines contributed positively to SDGs (oil extraction, for example, does not positively impact any SDG). Once all business lines were mapped to one SDG target, the percentage of that particular line’s sales revenues in the company was defined as the SDG contribution. 

It is important to note that the analysis of the different business lines of each company is very relevant. And it must be also noted that it is not possible to impact all of the SDG targets.  

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

Two investment portfolios were analysed in order to present the metrics and compare the results: one made up of the largest 440 European companies, weighted by capitalisation, and the other made up of the ESG best-in-class companies from each of the sectors, starting from the same investment universe, weighted by capitalisation.  

The results showed that in most of the impact metrics analysed, the second portfolio, as expected, presented more sustainable characteristics. Regarding the contribution to the SDGs, the portfolio formed by best-in-class companies had a greater impact than the portfolio formed without establishing ESG criteria. 

This analysis is applicable to any investment portfolio, investment fund or pension fund: fixed income as well as equity, or private assets. It can be carried out at the issuer level or, in the case of green bonds or social bonds or specific projects, at the product level. 

It is very important to pass this analysis on to customers, who are aware of where their money is invested, what their impact is on society, and what global goal of 2030 they are contributing to, and in what percentage.  

Real-world impact initiative of the year 

Winner

Green for Growth Fund
Finance in Motion

Give a brief overview of your project, its objectives, and why you decided to undertake it. 

The Green for Growth Fund (GGF) is an impact investment fund that mitigates climate change and promotes sustainable economic growth. It does this by investing in measures that reduce energy consumption, resource use and CO2 emissions in the European Neighbourhood Region, across Southeast Europe, the Caucasus, and the MENA region. Often faced with high-energy intensity, obsolete equipment, building stock in need of renovation, low awareness related to energy efficiency and its economic and environmental implications, the GGF’s target countries are in critical need of investments. 

Established in 2009, the GGF was designed as an open-ended private debt fund with assets of over €670 million. The fund was initiated by Germany’s KfW Development Bank and the European Investment Bank, with strong support from the European Union and German Federal Ministry of Economic Cooperation and Development. It was one of the first specialised vehicles to invest in renewable energy, energy efficiency, and resource efficiency measures. It pioneered layered fund structures that use publicly funded contributions to provide a first-loss tranche, and mobilise private capital towards green investments. This blended finance model provides a risk cushion for private investors, even when investing in relatively challenging geographies.  

The fund works through local financial intermediaries that disburse loans to individuals and businesses for measures to improve energy-and-resource efficiency.  

It also invests directly in renewable energy projects, such as the largest solar park in Egypt.  

The Technical Assistance Facility, funded by institutional donors and a share of the fund’s income, operates hand-in-hand with the fund, complementing its investments with on-the-ground support and capacity-building activities to bring energy efficiency, renewable energy and improved resource management into the mainstream. 

Please describe the scale of the project, financially and in impact terms. 

GGF’s growing investor base comprises 22 donor agencies, international financial institutions, and private institutional investors. With total commitments of nearly €700 million, the GGF has mobilised over €150 million in private capital towards green finance since its inception. 

During its first decade, the fund provided debt financing to 81 partner institutions across 19 markets in Southeast Europe, the Caucasus, and the MENA region. It has unleashed €1bn in green finance to over 36,000 clients, to help them reduce energy-and-resource consumption and expand the use of renewables. Financed measures range from installing rooftop solar panels and insulating houses to making industrial production processes more energy efficient. 

GGF also contributes to commercial renewable energy projects, many of which are the first of their kind in their country. To date, the GGF has supported over 1000MW of project capacity across its regions of operation. 

Collectively, these investments are now saving over 3.6 million MWh of energy, reducing emissions by over 920,000 tons of CO2, and contributing to more than 500,000 tons of water, waste, and input materials avoided/treated each year. 

In parallel, the GGF Technical Assistance Facility has implemented more than 350 projects with project volume of €14.5 million since inception. Through its activities it has supported 91 partners and trained over 6,600 people. 

Describe the process of delivering the project, including any challenges and how these were overcome. 

Financial institutions are at the core of GGF’s investment approach as they play a vital role in mainstreaming energy-and-resource efficiency and renewable energy investments by providing targeted financing to households, businesses, projects and public entities. The fund works closely with partner financial institutions to promote green finance as a viable business line. 

GGF also provides direct financing to selected renewable energy projects in its regions of operation, where well-structured project finance opportunities are scarce. In this way, the GGF is achieving a big impact by helping open up markets for commercial renewable energy development. 

GGF also provides financing to other types of non-financial institutions, such as:  

  • producers and vendors of energy-and-resource efficient technologies 
  • energy service and supply companies  
  • public sector entities for improved infrastructure and services.  

GGF gives close support to develop green finance products, train partner staff, build awareness of green finance within a partner institution, and offer assistance to end-clients for green investments, promoting sustainable growth. 

How successful has the project been and how have you measured this? What have you learned from this project that can be applied more broadly? 

To date, the fund has saved an average of 58% in energy, and 60% in CO2 across its portfolio - over-performing on its targets. To monitor its environmental impact, the fund employs an online tool, eSave, which allows users to verify eligibility for standard energy-and-resource efficiency measures as well as report individual projects financed by the GGF credit line. Depending on the scale and nature of the project, specialised consultants are engaged to assess the potential positive environmental impact. 

When it was created, the fund’s mandate was to invest in renewable energy and energy efficiency in the Western Balkans. Much has been added in the intervening years, including:  

  • Expanding from Southeast Europe into the Eastern Neighbourhood Region, followed by the MENA region. 
  • Pushing deeper into the real economy to stimulate new investments on the ground.  
  • Broadening the definition of green finance to include important measures at the nexus between energy and improvements in water, waste and material management. 

The GGF’s experience can provide a number of valuable lessons for the industry. Its ability to expand into new regions, reach out to more beneficiaries, and target a broader set of technologies and sectors has been thanks in large part to the fund’s blended finance structure.  

The risk capital made available by the combination of public and private funding has given the GGF the necessary flexibility to innovate and take on new challenges. 

Moreover, the GGF’s approach to working via a network of local financial institutions that on-lend the money to end beneficiaries has proved to be an efficient way to deploy mobilised funds and achieve impact at scale. 

Shortlist

AfricaGrow: a fund of funds for financing African SMEs and start-ups
Allianz Global Investors

Give a brief overview of your project, its objectives, and why you decided to undertake it. 

AfricaGrow was designed as a fund of funds to promote small and medium-sized enterprises (SMEs) and start-ups primarily in countries associated with the G20 Compact with Africa (CwA). The design and structure of the fund – a blend of public and private finance – will be used to close the existing financing gap, and build a solid equity base for African SMEs. Allianz Global Investors launched the fund jointly with the German Ministry for Economic Cooperation and Development (BMZ), and KfW.  

In addition to the basic investment, AfricaGrow hopes to catalyse the emerging private equity and venture capital market across Africa via a special Technical Assistance Facility This will not only support AfricaGrow’s target funds, and their portfolios of companies, but also support the development of the overall African PE and VC market. The deal team brings together German and International educational backgrounds, and professionals in private markets, investment banking and consulting across Frankfurt and London. 

Please describe the scale of the project, financially and in impact terms. 

The aim of AfricaGrow is to finance about 150 SMEs and start-ups in African countries through local funds by 2030. It will promote sustainable economic and social development, and aims to create more than 25,000 new jobs that can support manifold families and people.  

Great importance was placed on ensuring that investments have clear sustainability objectives. AfricaGrow uses a multidimensional index-based Development Effectiveness Rating (DERa) guided by the 2030 Agenda for Sustainable Development and the SDGs to measure those objectives. These include: 

  • long-term change by job creation 
  • local income ignition 
  • market development 
  • environmental responsibility 
  • and community benefits.  

The fund volume is €180-200 million. Of this, €100 million comes from BMZ, €30 million from KfW subsidiary, DEG, and €50 to €70 million from Allianz companies. A special feature is an additional budget in the tens of millions for accompanying support measures via the Technical Assistance Facility. 

Describe the process of delivering the project, including any challenges and how these were overcome. 

AfricaGrow was set-up within three months of being mandated. Given the complexity of a blended finance structure, with public and private partners, and in a jurisdiction where such structures are not very common, it was a big achievement to pull it together in that time. And, despite COVID-19, AfricaGrow is fully on track with its investment schedule.  

The fund’s unique investment approach allows it to address both the eco-systemic efforts required to train the African PE and VC sector, and at the same time, the needs of investors for long-term cash flows and returns – all the while generating a measurable social impact.  

The fund’s creators strongly believe that combining investment targets with measurable socio-economic impact allows for a competitive edge versus its peers, and will lead to stable investment returns. 

AfricaGrow faced multiple challenges on its way to success, and will no doubt face more. However, these challenges are seen as opportunities. To deal with Africa’s unique business environment, with all its risks, unknowns and cultural challenges, AfricaGrow has forged strategic partnerships with established local private-equity funds that act as a gateway through their extensive network and local expertise. 

How successful has the project been and how have you measured this? What have you learned from this project that can be applied more broadly? 

AfricaGrow is mandated to ensure that its target funds and the target funds’ portfolio companies commit to continuous improvements with respect to socio-economic factors, and work over time to apply relevant international best practice standards. AfricaGrow sticks to the following principles: 

  • minimise adverse impacts and enhance positive effects on the environment and all stakeholders. 
  • support the reduction of greenhouse gas emissions. 
  • encourage Portfolio Companies to work towards full compliance with the ILO Core Labour Standards, IFC Performance Standards and World Bank Group’s general and sector-specific EHS Guidelines, and to respect the International Bill of Human Rights. 

By sticking to these strict ESG standards, AfricaGrow contributes directly to the United Nations Sustainable Development Goals (SDG) 8 and 9. The fund plans to report on these KPIs annually, and there is a stringent process in place to make sure that lessons are learned as the projects develop. AfricaGrow has a five-year investment period, but the longer-term ambition is to establish a stepping-stone for companies so they can flourish way beyond that time – and benefit African people and the environment for decades to come. 

The AXA Impact Fund: climate & biodiversity - making a difference
AXA Investment Managers

Give a brief overview of your project, its objectives, and why you decided to undertake it. 

Launched in July 2019, the AXA Climate and Biodiversity Impact Fund, was created in response to a joint report by AXA Group and the World Wildlife Fund that highlighted the societal, economic and financial impacts of biodiversity loss and climate change. It showcases how an asset owner, a leading conservation organisation, and an asset manager, can work together to tackle societal challenges. 

The fund is a private equity vehicle with capital of $175m. It will back credible businesses that deliver intentional, measurable and positive outcomes addressing climate change and biodiversity loss.  

The fund uses private finance to support global solutions that conserve natural capital and ecosystems, promote resource efficiency and sustainability, and protect and empower vulnerable communities whose livelihoods are affected by the challenges of climate change and ecosystem degradation. 

It has already invested in a range of solutions in developed and developing countries and, despite being in the early stages of its 12-year lifecycle, the benefits it brings are clear: 

  • It is a practical illustration of how different stakeholders can work together to achieve ambitious goals. 
  • It provides capital to address Sustainable Development Goals focusing on climate change and environmental degradation. 
  • It demonstrates that investments in biodiversity and natural capital are a critical component of tackling climate change. 
  • It provides evidence that a credible and efficient investable approach can address climate change and biodiversity loss.  
  • It creates an attractive private market impact framework that gives investors flexibility to direct capital to regions with underdeveloped capital markets and to structure solutions that direct capital to the underserved challenges and people. 

Please describe the scale of the project, financially and in impact terms. 

The Fund was launched with $175m of capital from AXA Group. It forms part of an impact investing strategy established by AXA Investment Managers in 2012, where institutional investor clients have invested over $600m across four impact funds. 

The Fund’s objective is to promote mitigation, adaptation and resilience in relation to climate change and biodiversity loss.  

AXA expects to show that its investments have contributed, intentionally and at scale, to four critical Key Performance Indicators (KPIs):  

  • emissions avoided 
  • hectares of natural capital conserved 
  • size of critical habitats protected 
  • and number of vulnerable people helped. 

In less than a year since launch, AXA has allocated $41.5m of capital to a range of solutions aim to drive measurable impact alongside market-rate returns. These solutions: 

  • span developing and developed markets 
  • have global applications or touch on the climate and biodiversity vulnerabilities of regions 
  • help protect critical habitats and address water vulnerability in climate stressed regions, support the transition to the green economy, and deliver climate-resilient products and services for some of the world’s most vulnerable people 
  • will contribute to the fund’s objectives of benefiting one million vulnerable people, producing eight million Verified Carbon Units and protecting 800,000ha of critical habitats for globally important or threatened species. 

Describe the process of delivering the project, including any challenges and how these were overcome. 

The fund’s clear focus required AXA to review high quality science-based research, including reports from the IPCC, IPBES, Sustainable Development Goals and WWF, to ensure that projects are credible and relevant. Due diligence includes in-region visits to assess projects, and take on sponsors’ and other stakeholders’ views of a project and its risks. Investments qualify only if they can be proven to make a credible and material contribution to the people the fund is trying to reach, or the problem it wants to help solve. 

Key challenges that AXA has to manage include: 

  • Setting precise impact KPIs and targets at a fund level was initially challenging given the blind-pool nature of capital at the fund’s outset, the sheer range of projects and assets classes that could qualify, and their geographical diversity. AXA’s experience from earlier funds, alongside detailed work with sponsors and advisers, helped it build a model to track the potential impact contribution. 
  • The dual financial and impact objectives require transparency and fairness when working with stakeholders, particularly in areas such as natural capital, where projects have historically had access to philanthropic funding and investment valuation is in its infancy. 
  • Diversity in both geography and investment structuring requires a focus on the non-financial risks too. AXA has a dedicated operational due diligence team working with investees and potential investees to mitigate risks 
  • It is important that related ESG risks and other negative impacts on stakeholders are appropriately managed. A structured Environmental Social Action Plan is a necessary component of investments in this fund. 

How successful has the project been and how have you measured this? What have you learned from this project that can be applied more broadly? 

The fund is already delivering positive, measurable change less than a year into its expected investment lifecycle of 12 years. The full benefit of the fund has yet to be felt, but some key milestones that underline the fund’s potential impact include: 

  • AXA expects to enable the avoidance of 8m tonnes of carbon emissions over the life of the fund, while producing 8m verified tradable carbon units.  
  • AXA expects 800,000 hectares of land to be placed under improved management, while the same amount again will become areas of critical habitat for globally important or threatened species.  

Within a year of its launch the fund has invested almost a quarter of its capital in real-world projects that target climate change and biodiversity. Investments across developed and developing markets include: 

  1. An agroforestry project that protects the unique biodiversity of Madagascar. It will provide over 2,900 hectares for biodiversity and 528 hectares of critical habitats for lemurs. This will create 120 jobs. 
  2. A conservation strategy in water and climate stressed areas of California. This project is expected to address 30% of the annual groundwater overdraft; 24% of the migratory bird habitat; and 28% of the land restoration needs of the California San Joaquin Valley – a very important region for food production in the US. 
  3. An investment to reduce the climate vulnerability of at least one million people in developing countries by delivering climate-resilient products and services which will mitigate the damage, disruption, risk and resource scarcity that can follow from changes to the global climate. 

The Fund is putting $175m to work on behalf of one of the world’s largest institutional investors, delivering crucial funding to address the needs identified by UN Sustainable Development Goals 7, 11, 12, 13, 14 and 15. 

The fund has shown important lessons that will help in the development of future impact strategies. It has emphasised the benefit of collaboration amongst different stakeholders; the necessity of defining a mission which guides the identify of a fund; the need to use science-based research to reinforce the credibility of the strategy and finally, to hold all the asset manager and project sponsors to account with clearly defined metrics and targets. 

A scalable private market solution for preserving and rehabilitating housing for America’s “missing middle” – Bridge Workforce and Affordable Housing Fund LP
Bridge Investment Group

Give a brief overview of your project, its objectives, and why you decided to undertake it. 

Bridge Investment Group launched the Bridge Workforce and Affordable Housing Fund (Bridge Workforce I) in 2017 to provide a private, scalable solution and that could build thriving communities far beyond ‘four walls and a roof’. 

Rising construction and regulatory costs, persistent labour shortages, NIMBYism and a government-subsidised housing deficit have stymied investment in affordable housing for the two-thirds of US renters earning under 80% Area Median Income (AMI). These people represent the core of the U.S. workforce but are largely ineligible to receive government subsidies, and are priced out of market-rate housing.  

The fund was created to support these people. With nearly 50% of US renters facing rising rents, falling vacancies, and lagging wage growth, the affordable housing crisis is more pronounced than ever. 

Bridge Workforce I targets the preservation, rehabilitation and/or building of affordable housing communities where at least 51% of residents earn at or below 80% AMI at acquisition. And throughout the firm’s ownership, meeting the needs of the growing and priced-out ‘missing middle’.  

In addition to direct investment in affordable housing, Bridge has lowered its management fee by 25 basis points a year and works with a not-for-profit partner, Project Access, so that it can provide extra funds for onsite community, environmental and social programming. These programmes include on-site resident resource centres, youth and adult education, credit scores, and childcare programmes. 

Bridge has also adopted metrics that allow investors to compare the impact performance of Bridge Workforce I to industry targets and benchmarks.  

In addition, the firm created the Bridge Community Enhancement Initiative to commit $30 million to support its firm-wide pillars of connecting, educating, and empowering its residents. 

Please describe the scale of the project, financially and in impact terms. 

Bridge Workforce I raised $619 million in equity commitments from investors through its final close in August 2019. As of March 31, 2020, 8,700+ workforce and affordable housing units have been preserved and/or rehabilitated across 25 communities and 22 U.S. cities. Communities in San Francisco, CA and West Valley, UT will enjoy a combined 670+ newly built units, exemplifying Bridge’s commitment to areas most needed. 

The Fund requires that rents remain at affordable levels for at least 51% of tenants earning less than 80% AMI throughout the firm’s ownership, although Bridge actually manages to more affordable rent thresholds.  

Attractive financing was another key component for Bridge to achieve success with its efforts. Thanks to a long-tenured relationship with Freddie Mac, Bridge secured a first-of-a-kind single-sponsor Social Impact facility, which has grown to $750 million. It provides best-in-class financing rates, terms, and execution. This has helped make projects financially feasible and drive substantial cost-effective renovations to improve resident quality of life, while enhancing investor returns and promoting a joint mission of affordability. 

Describe the process of delivering the project, including any challenges and how these were overcome 

Bridge’s experience with affordable housing began in 1995 with its acquisition and rehabilitation of 500-unit Warwick Square in Santa Ana, CA, a large LIHTC community that Bridge principals still own today.  

During its first year of ownership, Bridge faced a harsh 100% residential turnover rate. By 2016, through building renovations and the creation of playgrounds, a solar system, and a dedicated onsite resource centre, in partnership with Project Access, Warwick achieved a remarkable 9% turnover rate, doubled net operating income, and helped 1,200+ residents with health, education, and employment services.  

Bridge has grown this partnership to 25 active property operations, spanning 19 resource centres and six under construction, and supported tens of thousands of residents along the way. 

With the current assets, typical challenges have included building temporary resource centres while renovations and facility improvements are completed.  

In addition, Project Access and Bridge’s property management teams actively engage with residents through surveys to tailor services to suit residents. This has proved to be especially valuable during the COVID-19 pandemic.  

In short order, Project Access adapted its programme model and made significant contributions to residents, including meal distributions, wellness checks, and referrals to critical services numbering in the thousands, along with continued virtual employment and homework assistance. 

Bridge has also brought new affordable housing to San Francisco, where, like other high-density cities, it is notoriously difficult to secure zoning approvals and new construction permits. In partnership with affiliates, Bridge achieved an expedited process for not relying on local subsidies to begin developing TL 361, the only non-government subsidised, affordable housing project in SF.  

Another project, TL 361, located in the Tenderloin District, is expected to deliver 240 units and utilize high-rise prefab technology, thanks to a partnership with Panasonic, to drive 35% lower costs and 40% faster completion times than competing projects. 

How successful has the project been and how have you measured this? What have you learned from this project that can be applied more broadly? 

The successful $619 million equity raise for Bridge Workforce I has led to the preservation and rehabilitation of affordable housing across high-growth cities such as Denver, Atlanta, Nashville, Sacramento, Chicago, Dallas, Salt Lake City, and Las Vegas, to name a few. Investors of Bridge Workforce I subscribed to a risk-adjusted market return target of 9%-11% net IRR, with a true double bottom line benefiting investors and community. As of March 31, 2020, the Fund is currently in its investment period though is already outperforming with a projected net return of 12.5%. 

The Bridge Community Enhancement Initiative plans to commit $30 million over the lives of Bridge Workforce I and its successor, Bridge Workforce and Affordable Housing Fund II, launching in Q2 of 2020, to support its firm-wide pillars of connecting, educating, and empowering its residents. Bridge targets a minimum of 30% resident population participation in social and community programmes as well as 75%+ youth participation improvement in report card performance year-over-year.  

Building upon Project Access’s existing offerings, the Bridge Community Enhancement Initiative plans to: 

  • provide college scholarships
  • fund grant competition for community enhancement projects 
  • host quarterly Bridge Community Days to link residential communities. 

Bridge is also focused on green Initiatives at its communities, helping to promote efficiency, cost savings, and environmental stability through Freddie Mac’s “Green Advantage” programme participation, appliance replacements, xeriscaping, energy-efficient lighting and low-flow replacements, renewable plant-based carpet material, and usage of zero-VOC paint. 

For impact measurement, Bridges uses an independent third party, Global Impact Investing Network’s Impact Reporting and Investment Standards (“IRIS”), that provides an objective and nationally relied upon framework and are aligned with United Nations Sustainable Development Goals. This IRIS report is produced semi-annually and focuses on reporting across affordability, environment, and social and community metrics. 

As of Q3 2019, across Bridge Workforce I has: 

  • conserved 2,601,750 kWh of power since H1 2018  
  • made 508,854 square feet of energy efficiency improvements since H1 2018  
  • made 21.8% cost savings relative to average market rents between Q2 and Q3 2019  
  • financed 44 community facilities   
  • offered 274 Health & Wellness, 221 Education for Youth, and 259 Economic Stability programmes. 

The journey to net zero
M&G Investments

Give a brief overview of your project, its objectives, and why you decided to undertake it. 

M&G Real Estate aims to reduce the energy intensity of its global real-estate portfolio by 25% by 2025, compared to 2013, and to be net zero carbon by 2050. 

Real estate is responsible for producing around 40% of global carbon emissions, which makes it a key target for government carbon reduction and energy efficiency policies. As such, and to meet the ambitions agreed at COP21, all new buildings must operate at net zero carbon from 2030, and 100% of buildings must operate at net zero by 2050. 

Driving environmental improvements at the firm’s assets not only benefits the planet, by reducing carbon emissions and the use of natural resources, it also drives lower occupancy costs through operational efficiency. This is particularly important given the challenging market conditions for some of M&G’s occupier base.  

By the end of 2019, M&G had achieved a 26% reduction in energy intensity for landlord-purchased utilities based on an indexed trend compared to 2012/13. Over the same period, it reduced absolute carbon emissions by 23%. 

Please describe the scale of the project, financially and in impact terms 

M&G’s green energy procurement saved 200,000 tonnes of carbon compared to buying brown energy. This is enough to power 31,000 homes for a year. The firm also produced 2 GWh of renewable energy on-site during 2019, with significant scaling up planned over the next two years. 

Describe the process of delivering the project, including any challenges and how these were overcome. 

M&G took a multi-pronged to integrating ESG considerations into its investment process:  

  • New acquisitions must now meet in-house requirements on ESG. 
  • Post investment, the firm’s global data management and reporting system identifies actions to improve energy efficiency.  
  • On development and major refurbishment projects, M&G seeks green building certification. 

Examples of initiatives M&G has implemented to drive reductions include: 

  • Targeting low and ‘no costs’ energy reduction measures at assets, such as ensuring on-site teams focus on efficient energy management and rolling out LED lighting wherever feasible. 
  • Introducing real-time monitoring of high-energy users through smart building technology, such as at the Manchester Arndale shopping centre in the UK, where a 36% reduction in total energy used has been achieved. 
  • Realising energy efficiency measures through retrofit, for example at Compass One, Singapore, where a refurbishment of the shopping centre saved over 1 million kWh. 
  • Benefiting from the sale of some older, less efficient buildings and buying newer, more efficient assets. 
  • Installation of renewable technologies. 

Key challenges: 

It took a lot of work to gather information from M&G’s property assets all over the world, and once gathered, it required extensive training with property managers to ensure the information was understood. It remains a challenge to gather data from occupiers and set targets that extend to scope three emissions. However, M&G is addressing this through greater engagement with occupiers on the importance of the data, and trial use of smart building monitoring in its occupier spaces to provide data and help occupiers to reduce consumption. 

How successful has the project been and how have you measured this? What have you learned from this project that can be applied more broadly? 

The success of the project is backed up by results (as outlined above) and, in addition, green building certification provides an independent verification of performance. 

M&G has trialled various initiatives that have achieved their intended outcomes. For example, LED lighting, photovoltaic panels, smart building monitoring. This has shown that these programmes and achievements can be delivered globally when rolled out using a framework and training. The work M&G has done puts its in a good position to build upon its net zero carbon ambitions. It is also currently undertaking work to develop net zero pathways for its funds. 

 

Emerging markets initiative of the year 

Winner

Agile & comprehensive ESG management system
Abris Capital Partners

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

Three principles guide Abris in its approach to ESG incorporation:  

First, to obtain objective and measurable results that allow Abris to minimise ESG risk, and build the value of portfolio companies. Measurable results enable: 

  • The Deal Team and the ESG Team to make appropriate decisions. 
  • The limited partners to analyse Abris’s ESG practices. 
  • And potential investors to assess the value built in the company, thanks to ESG, on the basis of objective indicators. 

Second, to ensure a comprehensive assessment of ESG threats and opportunities. 

Third, to be flexible enough to take into account new ESG trends and challenges, as well as stakeholder expectations, without compromising any elements of objectivity and comparability of measurable data. 

Abris’s approach is innovative because: 

  • It has created a measurable methodology for risk assessment in each ESG area. It assesses the ESG risk by defining the probability of an event occurring, and then estimating the impact on the company’s EBITDA.
  • It has developed a comprehensive ESG analytical tool consisting of nearly 500 measures, based on recognised international standards and knowledge of local risks. 
  • If LPs’ requirements change, the system is flexible enough to incorporate new ESG areas to the analysis. It can also adapt to new approaches in such areas as: climate change, diversity and inclusion, corporate governance or cyber security. 

Abris has created a proprietary ESG Scoring Application that comprises five modules: 

  1. Diagnostic module – gives a comprehensive ESG review of the company. 
  2. Analytical module – shows whether the ESG projects being implemented impact the portfolio company’s KPIs. 
  3. Management module – tracks progress and creates action plans. 
  4. Cooperation module – allows for cooperation between the ESG Team, Deal Team and ESG Coordinators in portfolio companies. 
  5. Presentation module – allows for transparent data presentation. 

This ESG scoring systems means that: 

  • The Investment Committee has measurable, transparent and generic ESG information 
  • The Deal Teams can better supervise the investment 
  • The ESG Team has full documentation in one place 
  • Portfolio companies can analyse their status and supplement documentation. 

How does this approach stand out in the market? Why is it unique? 

Most available tools have a minimum common area for companies from different industries, which is then expanded by industry-specific modules. This approach hinders comparability and is not ideal for private equity funds, which tend to have investments dispersed across multiple industries.  

Abris carries out the same comprehensive analysis of each company, identifying the material ESG aspects for each company, but regardless of the industry in which it operates. Thanks to this approach, the firm’s investment professionals are less likely to overlook any significant ESG risk. At the same time, Abris maintains comparability. 

Abris’s approach stands out because:  

  • It covers the entire investment process and the most important ESG areas, with nearly 500 carefully selected measures.  
  • This is the first tool of its type that has been developed for Central Europe. 
  • It is easy to use, and with several levels of detail adapted to the recipient. 
  • It presents clear information that expressly indicates the potential financial losses that may be incurred if the identified ESG risk materialises 
  • Abris’s approach requires the involvement of the Deal Team, the ESG Team, and portfolio companies, which increases the efficiency of work in the area of ESG. 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

At the beginning of 2019, the ESG Team visited each portfolio company and carried out 250 interviews with the people responsible for all elements of ESG. Based on these visits and document analyses, a risk map was devised and the ESG management level was determined in each company. The ESG Team, together with the Deal Team and the management board of the company, prepared ESG action plans for the whole year. The plans were put on the IT platform. At least once per quarter, ESG calls were arranged to discuss the project status and incidents. In total in 2019, approximately 90 calls were held. 

Thanks to the risk analysis, Abris now knows which ESG areas entail the greatest risk for the whole fund. The ESG Team can prepare actions supporting all companies in minimising the specific risk.  

Such risks include, for example, machinery safety compliance. The ESG Team organized a training course on this issue for companies and recommended an audit in each production company, plus the adaptation of machinery to the minimum safety requirements.  

Corruption was another ESG risk, and so the ESG Team put together an anticorruption and whistleblowing programme in each company. In one of the companies, high risk of violation of human rights was identified, which led to an action plan being put in place.  

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

ESG is not well understood within companies in Central Europe and is not linked to building company value. 

The Agile and Comprehensive ESG Management System, through the breadth and precision of the analysis, and the required involvement of senior and middle management in portfolio companies, plays an educational role, building awareness about ESG threats and opportunities.  

Thanks to Abris’s risk analysis method, and visualisation of results, it’s possible to identify which ESG risk may have the greatest impact on the company’s EBITDA. Linking ESG with EBITDA allows Abris to estimate the financial impact of ESG both for the Deal Team and for the company managers. In addition, adding historical data has already made it possible to prepare a comparative analysis. The approach is repeated regularly every year, and with each new investment. 

Abris measures its success in the following ways: 

  • Mitigation of ESG risks: both the financial impact of the risks and the reduction in the probability of them occurring.  
  • Increasing the level of the companies’ management of individual ESG areas, divided into 10 sections and more than 40 specific subsections. 
  • Improvement of the adopted KPIs thanks to ESG initiatives. 
  • The level of execution of annual ESG plans of companies. 
  • The level of execution of ESG exit plans. 

One of the key lessons learned, which Abris has also addressed in its approach, was finding a method which would make it possible to implement such an extensive analysis with limited time commitment from the Deal Team and company managers.  

To solve this, we incorporated the analysis into a user-friendly IT tool, making it possible to speed up the diagnosis, quickly draw conclusions and make decisions based on the data, and easily monitor progress. 

The challenge in ESG projects is to link ESG factors with financial indicators (including CAPEX) in order to manage the investment even better. In the future, we plan to link selected ESG indicators with the line items in the financial statements, making it possible to assess the risks in even more detail and estimate the investment value more accurately. 

Shortlist

Increasing Crehana’s reach in low-income populations
Acumen LatAm Impact Ventures LLC - “ALIVE Ventures” and Crehana Education

Give a brief overview of the initiative, its objectives, and why you decided to undertake it. 

In 2019, ALIVE Ventures (ALEG) launched a project to expand the social impact of the Peruvian online learning platform, Crehana Education. A company within ALIVE’s portfolio, Crehana helps Spanish-speaking students get access to education, and develop creative and digital skills through online project-based courses. The courses are developed by industry experts, and are designed to help people access qualified jobs in different industries. 

The fact that Crehana’s courses are sold at affordable prices and that some of them are even available for free, allows the company to reach students from any socioeconomic segment. However, according to an impact measurement study conducted last year, the team estimated that around 10% of its students live below the poverty line and extreme poverty lines.  

While the course has already reached a large number of disadvantaged people, (~200k students living in poverty), ALIVE saw an opportunity to further expand its reach. Crehana and ALIVE agreed that not only was this a good chance to make a genuine social impact, but also a good business opportunity in an under-served market.  

Describe how your project is aligned to Active Ownership 2.0, including: the significance of the systemic, real-world outcomes it seeks. 

The high barriers to entry into higher education in Latin America prevent millions of young people from having access to qualified job opportunities. Two-thirds of Latin American youth do not have university degrees or higher technical education, and around 20% of young people are unemployed. Crehana offers an affordable and innovative pedagogical model that allows people from any socioeconomic segment to quickly and continuously learn in-demand skills and improve their employment opportunities.  

According to an impact study performed by 60 Decibels, a global firm specialized in impact measurement, +80% of students apply what they learn in the platform in their current job, +63% of Crehana’s graduates recognize Crehana’s importance in enabling them to get their current job and +36% have jumped into a higher income bracket after studying in Crehana. 

Throughout the project, the level of involvement and commitment from both ALIVE and the Crehana was permanent. Monitoring meetings were held on a weekly basis, with both an ALIVE member and a team member from Crehana. Likewise, the project involved a series of meetings with external parties, including government and different corporations in Lima. 

The challenges associated with this initiative (e.g. free rider issues hindering first movers). How these were overcome, and what was learned. 

The most common challenge faced was in engaging external parties to participate in the project. 

After vast market research and internal brainstorming ALIVE found there were three main channels through which Crehana could expand its presence in vulnerable populations:  

  1. Business to Government (B2G) - Partnering with education ministries to enable students from public schools to access Crehana’s content. 
  2. Business to Business (B2B) – Partnering with big corporations and NGOs that are providing access to education to disadvantaged populations. 
  3. Business to Customer (B2C) – Partnering with media companies with target audiences concentrated in low-income populations.  

All these solutions required ALIVE and Crehana to establish a significant number of connections with external parties, which in some instances were hard to achieve. And even once established, closing a partnership can take a while. A good example of this was with the Peruvian Ministry of Education. It can take between six months and a year to close a contract, and start a pilot, with the ministry. To overcome this difficulty, ALIVE and Crehana contacted several education companies who had in the past successfully completed contracts with the government, and were able to learn important lessons from their experiences.  

The team learned not only which departments and people it should reach out to, to present Crehana’s solution, but also what were the key considerations that the ministry usually takes into account when choosing an education programme. 

For instance, ALIVE and Crehana learned that the ministry favoured projects that were quick to implement, could be scaled rapidly, and the educational impact of which could be monitored and measured. The team took all these recommendations on board, and managed to agree a pilot programme with the ministry in a record time of just four months. 

Corporate Governance 2020 Annual Study – performance of Latin American companies
GovernArt and Vigeo Eiris Chile SpA

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

Vigeo Eiris Chile and GovernArt published the Corporate Governance Annual Study 2020, Performance of Latin American Companies. The main objective of the study was to observe the corporate governance performance of Latin American companies. Released in Spanish and English, it is the first study to provide detailed research and analysis of how 139 companies in Brazil, Chile, Colombia, Mexico and Peru, tackle risks related to business ethics and corporate governance, split over seven aspects of evaluation. 

Vigeo Eiris Chile and GovernArt’s approach differed from previous research in the following aspects: 

  • It was the first research of its kind to look at corporate governance and business ethics directly related to Latin American companies. 
  • The data collection process and analysis used not only the company’s websites and public documentation, but also included direct communication via online questionnaires and external stakeholders’ sources. 
  • The study gives a global overview of the performance of companies in the region, and compares countries with each other for each aspect of the evaluation.  
  • The research looks at how Latin American companies are performing compared to the rest of the world, highlighting strengths and areas of improvement. 
  • For most of the seven aspects of evaluation, noteworthy trends have been analysed and contrasted with the national context.  
  • Emphasis has been put on companies with the highest performances, detailing their approach to each aspect, while some of the most significant controversies have been highlighted, along with controversy statistics. 
  • Vigeo Eiris Chile and GovernArt assess Latin American companies through this same methodology every 12 to 24 months, to provide updated assessment to its investors.  

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

The study’s methodology contains three key elements: 

ONE: Geographical scope 

The study assessed 139 companies that are part of the universe of research of Vigeo Eiris. These companies are headquartered in five Latin American countries, broken down as follows: Brazil: 55, Mexico: 28, Chile: 26, Peru: 18, and Colombia: 12. 

TWO: Aspects of evaluation 

The study evaluated companies based on seven aspects, which were gathered into two categories: 

Corporate Governance: 

  • Board of Directors 
  • Audit & Internal Controls 
  • Shareholders 
  • Executive Remuneration 

Business Ethics: 

  • Prevention of Corruption 
  • Prevention of Anti-competitive Practices 
  • Transparency and Integrity of Influence Strategies and Practices. 

N.B. the relevance of each aspect of evaluation for the sector or industry was taken into account, meaning that some of them have not been assessed for all 139 companies. 

THREE: Performance 

The performance of the companies was scored on a scale from 0 to 100. The average score per country was provided on an overall basis (average of the seven aspects of evaluation). In addition, the average score for each aspect of evaluation was also displayed at country level.  

The study shows a regional ranking and a ranking per country based on the overall score, as well as a ranking of the companies achieving the top 10 scores for each aspect of evaluation. 

The study contributes substantially to advancing knowledge and understanding for each aspect of evaluation, by providing both qualitative and quantitative information.  

The seven aspects are assessed following the same structure: 

  • Overview: clear information on topics of interest assessed for each aspect, and why they matter. 
  • Global performance of LATAM companies:  the study shows quantitative information about the overall score of companies in the region, and detailed statistics of practices implemented by these companies. 
  • Noteworthy trends: trends worth highlighting and analysing (e.g. when a country is performing above or below its peers in a certain aspect of evaluation, which is contrasted with regulations at country level). 
  • Top performers: explanation of the performance of the three companies achieving the highest score, per aspect of evaluation. 
  • Controversies: statistics about the controversial cases identified in the region linked to the aspect of evaluation in question, and details about the major cases. 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

The Study demonstrated new, meaningful insights into the macro trends of the governance performance of Latin American companies. The quantitative and qualitative information, the rankings, and the scores contained within the research can be used as a primary source of information by investors that pay special attention to governance and ethics issues, in order to further drive their investments in a country or a specific company. 

Latin American investors who are starting to consider ESG factors in their investment decisions can use the results of this study to challenge companies and identify key areas of improvements at a country level.  

The highlights of the study provide consolidated indicators that allow investors to focus on a few main governance topics, if they are not able themselves to conduct a holistic governance assessment of companies. 

The detailed information also allows the investee companies themselves to compare what they have implemented and reported, versus what is expected from the market players, in particular on those aspects where Latin American companies are performing below the other markets, such as Europe and North America. Based on their assessment, companies could choose to focus on areas of improvement, which in turn would enable them to attract responsible investors, but also inspire other companies in the country and industry in which they evolve. 

Finally, the qualitative content of the study is useful for Latin American pensions and securities regulators like the Chilean Comisión para los Mercados Financieros, which is currently updating ESG and corporate governance reporting standards and best practices. 

Developing a robust and effective ESG integration programme in China
Harvest Fund Management

Give a brief overview of your innovative approach to ESG incorporation, its coverage within your firm and why you decided to undertake this approach. 

Harvest’s China ESG programme involves proprietary ESG scoring and research, and regular ESG risk monitoring and alerts. The results are accessible on an ESG dashboard that is integrated into Harvest’s core investment platform.  

Harvest’s team of independent ESG specialists provides daily research support to investment and risk management teams, and portfolio ESG risk exposure is reviewed and discussed at regular investment committee meetings. 

The firm collects raw data from thousands of data sources using the latest AI technology. It uses the data to map material ESG issues and metrics through rigorous modelling, and then incorporates investment analysts’ qualitative views and first-hand information from direct contact with companies.  

It is aligned with globally accepted frameworks, but with China specific metrics added and scoring criteria adjusted to reflect local conditions and materiality. Under the framework, the entire China A-shares universe is scored, based on their ability to manage material ESG risks and opportunities. Factor effectiveness is ensured through rigorous testing, and results show that Harvest’s ESG factor is effective in capturing alpha in China. This approach is necessary because low ESG data quality and availability is a common barrier in the Chinese market.  

Harvest’s approach to ESG integration is unique in that the data collection, assessment, and decision-making process is internalised and customised to account for local market conditions. Fragmented ESG information is collected and aggregated at regional and firm levels to generate accurate, detailed, and timely information about investee companies. The ability to cover the entire A-share equities universe offers the benefit to derive meaningful insights about sectors and the market, which fills a current market blank. 

How does this approach stand out in the market? Why is it unique? 

  • Harvest has put in place an ESG analytical framework that combines global best practices with the unique nature of local markets. 
  • Harvest combines proprietary ESG data with third-party ESG data, including information gathered using artificial intelligence and Natural Language Processing technologies. 
  • Harvest operates a full proprietary quantitative scoring of the entire China A-share market, based on a selection of over 110 material metrics, and fundamental coverage of the firm’s equity investments.  
  • Harvest’s in-house ESG research is based on high levels of transparency on quantitative and qualitative inputs.  
  • The ESG dashboard is integrated as a core module of the firm’s internal investment platform and database. 
  • Sector analysts and portfolio managers are equipped and required to incorporate ESG insights when making investment decisions.  
  • Similarly, all sector analysts are involved in the semi-annual qualitative assessment of material ESG issues through a sector-specific ESG questionnaire developed by the ESG team to supplement the quant scoring of investee companies. 
  • Harvest engages with regulators, industry bodies, investors, and investee companies to promote and advise on various ESG related issues in the region, including awareness, reporting, sustainable practices and policies. 

Give a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio), including any challenges faced and how you adapted to them. 

Harvest’s ESG scores were used to develop a passive investing strategy for the A-share market. In November 2019, China Securities Index Co., Ltd. (CSI) launched the CSI 300 Harvest ESG Leaders Index. The index was constructed through selecting ESG leaders within each sector according to Harvest’s proprietary ESG scores, while maintaining sector neutrality to the benchmark CSI 300 index. The index delivered 4.7% in annualised excess return over the benchmark during the period of January 1, 2016 – March 31, 2020. This performance demonstrated that Harvest’s ESG factor offers the potential to generate alpha, and that ESG factors are material investment signals in the China A-shares market. 

A major challenge for the index development process is to determine the materiality of various underlying ESG metrics for Chinese companies, while ensuring that emerging and material issues are captured. To overcome this challenge, the ESG team collaborated with the quantitative and fundamental investment teams, and performed rigorous factor analysis, testing and optimisation for nearly a year. A wide range of construction methodologies were considered and debated adequately internally until the optimal version was finalised. The effectiveness of the final index methodology was subsequently validated by CSI. 

What were the outcomes of this initiative for the investment and how have you measured its success? What have you learned from this approach that can be applied more broadly? 

The ESG integration programme has given an alternative perspective on the investment process that was not very well understood before. And it will be a driver to enhance the overall quality of investment returns for investors into the future. 

In addition to the periodic publication of thematic, sector, and company ESG reports, the ESG team has provided a series of well-designed training programmes to all investment teams, and regular updates of ESG developments and investment trends through investment strategy meetings and internal ESG newsletters. 

Since the inception of the ESG integration programme: 

  • Analysts’ understanding of ESG issues has been rising, measured by increasing references to ESG issues in research reports and investment recommendations.  
  • All sector analysts have been trained on the governance assessment model, and have participated in semi-annual assessments of governance quality of investee companies. 
  • Internal governance ratings and assessments have been systematically incorporated into internal investment ratings and valuation.  
  • Sector analysts and portfolio managers have started to engage proactively with investee companies regarding ESG issues and areas of potential improvement. 
  • As of April 2020, Harvest’s ESG scores have achieved 100% quantitative coverage in the China A-share equity markets, and 100% deep-dive qualitative coverage of the firm’s key holdings.  
  • ESG scores and qualitative assessments have also shown to be important forward-looking indicators for management quality of companies, in many cases, and have been able to predict major governance failure and controversies of Chinese companies. 

In addition to this, the effectiveness of Harvest’s ESG scores has remained strong during the COVID-19 crisis: on average, the one-third of companies with highest ESG scores outperformed the one-third of companies with lowest ESG scores by 4.1% since the outbreak of COVID-19. And maximum drawdown was lower by 3.3%. 

Next steps are to ramp up portfolio-level requirements and to launch passive and active investment products based on Harvest’s proprietary ESG research, domestically and internationally. Harvest’s ESG integration programme will gradually extend to cover all major asset class and other markets.  

ESG Research Platform
Resultante Consultoria

Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research. 

Resultante worked with institutional investors in Brazil to promote access to, and the effective use of, ESG information. The firm helps each client, whether they are an asset owner or asset manager, to deepen their analysis of ESG issues according to their specific investment culture and approach to asset allocation and stock picking. 

Resultante’s ESG research approach is unique in the region because it can be tailored to each client’s investment culture. It provides a comprehensive database of ESG practices that investors can customise, and to which they can attribute their own weightings. In this way clients can produce an individual ESG score that measures macro trends such as climate, biodiversity, diversity or any other ESG aspect in Resultante’s reports.  

In addition to this, in 2019, Resultante launched its own ESG Research Platform that allows investors to access ESG reports and then compare the ESG performance of invested companies against their sector, peers and over time. 

User experience was a high priority in the development of the ESG Platform. The idea was to customise each client’s platform according to their individual score weightings, and to create profiles that allowed them to see the exposure of their investee companies to macro trends, such as climate risks. This is then complemented by presentations and portfolio analysis by Resultante’s own research team.  

Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change. 

Resultante works with a proprietary ESG Research methodology, organised in five categories for each of the E, S and G dimensions. The criteria are based on the most relevant reporting frameworks (e.g. SASB and GRI), sustainability indexes (e.g. DJSI and the Brazilian ISE), local and international academic papers, as well as PRI publications such as the Integrated Analysis, that informs our approach to macro and top-down ESG analysis. 

Bottom-up ESG Research 

Clients can customise Resultante’s methodology, first of all, by weighting the dimensions they consider more relevant in each sector and, second, the aspects they consider more relevant according to their own investment culture.  

Resultante works closely with clients to create these customised weightings, which are then uploaded to the client’s ESG Research Platform. All databases from the current and previous years are then made available in the client’s individual score. 

The analysis and corporate ESG scoring process involves five steps: 

  1. Resultante’s team analyses public documents and media related to the company’s ESG performance. 
  2. The preliminary score is set by evaluating companies’ practices in four levels, according to sector specific protocols, from non-existent to market leader. 
  3. Companies are contacted in case there are any doubts or to check specific initiatives. 
  4. The final score is attributed according to each client’s weighting and uploaded to the ESG Research Platform. 
  5. Resultante’s ESG Research team organises presentations that identify the companies’ risks and opportunities. 

Top-down ESG Research 

After the analysis of corporate practices, Resultante’s team conducts deeper research into the company’s business model and its exposure to macro trends. These are divided into four different dimensions: physical, regulatory, demand and capital aspects.  

We present the final results to clients as a combination of both top-down and bottom-up approaches, with specific analysis for SDGs and other relevant aspects to their portfolio. 

Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system. 

Local investors have found Resultante’s ESG Research Platform to be a useful tool to help integrate ESG into their investment decision-making process. It is user-friendly and makes it easier for them to access and compare information on different companies. Since its launch Resultante has gained four new investors, including the second largest pension fund in Brazil.   

Resultante’s reports include opportunities for discussion and engagement with invested companies. This includes exposure to specific sector or company risks, as well as opportunities for ESG integration into strategic planning and management practices. The result is that clients have increased their engagement with the companies in their portfolio. This includes using Resultante research for IR teams, and the execution of specific projects for corporate ESG integration. Some examples of engagements involve:

  • Climate risk assessment and carbon pricing impact. 
  • Supply chain management practices and policies. 
  • Corruption and bribery: integrity programmes and governance. 
  • Regulatory changes: for example the ethanol industry in Brazil, regarding RenovaBio’s programme from the Federal Government. 
  • Use of the ESG Score as a stock-picking filter 

Clients use the ESG scores in different ways: according to their portfolio concentration, investment strategy and the maturity of their ESG integration process. Initiatives include: 

  • Use of ESG scores to develop an ESG internal index, that is used as a reference to over and underweight positions in the portfolio 
  • Use of ESG scores as a filter to investment. 

Resultante sees itself as a research provider that not only aids the micro investment research process, but also increases the awareness of investors to macro trends and their potential impacts on portfolio analysis.  

The next steps in this project will be to include macro research in the ESG Research Platform, and translate research into other languages. This will increase the visibility and depth of clients’ understanding of the Brazilian market, as well as their own progress in ESG analysis and integration.