Marie Niemczyk leads Candriam’s environmental, social and governance (ESG) client portfolio management team. Her role is to provide Candriam’s ESG expertise and sustainable solutions to investors. She joined the company in 2018 as head of insurer relations, in 2018 from Axa Investment Managers, where she was director of strategy and development.
Marc Fassone: What are the aims of your ESG model?
Marie Niemczyk: We have three objectives. First, of course, is to know, identify, moderate or avoid the negative impacts that investments may have on the environment and society. Secondly, we seek to identify and reduce risks to investments due to sustainability risks. The ‘double materiality’ as it is called in the EU regulation. And thirdly, to identify opportunities for our clients, whether they come from macroeconomic trends related to sustainability--energy transition, health--capital reallocations or regulation.
How do you set this to music?
Our belief at Candriam is that ESG analysis should be fundamental. We have a team of analysts who do fundamental analysis of the ESG quality of companies. We also use data from third party providers, ensuring that it is material and relevant.
Based on these principles, we have developed models for corporate and sovereign analysis.
What are the relevant focus points for corporate analysis?
For companies, we first have filters, a ‘negative’ approach in which we analyse compliance or non-compliance with major international standards and controversial activities. On this basis, we may have to exclude certain investments.
We also have a ‘positive’ approach, which is based on two pillars: the consideration of all stakeholders of companies. This includes the climate, employees, customers and society. But we try to go further by determining whether their activities are more or less well exposed to the major sustainability trends and whether they will be able to benefit in the long term from the transformations that the world is undergoing today. This is very important. And that is what makes our model special.
Does this approach also make sense for governments?
Yes, we seek to determine the trajectory towards sustainability of a state, a trajectory that varies from one country to another. If we apply the same criteria to all states, their importance varies. In France, we look at the number of electric vehicles. In sub-Saharan Africa, access to primary education, water, electricity, etc. This is a very granular notion of ESG, which allows us to identify quite precisely not only the risks, but also the opportunities in each country.
Intuitively, one might think that ESG ratings are more suited to developed country equities and lose their relevance when it comes to governments. Do you think this is not the case?
This is a myth that has prevailed for a long time. Today, we know that ESG does not only apply to equities, but also to debt, whether listed or not, and to private equity. With other levers and approaches, ESG can be applied to all asset classes. There are of course some exceptions where it is a bit more complicated due to the nature of the instruments such as derivatives.
Looking at ESG for companies allows for a much more global risk management and a good identification of opportunities.
Looking at ESG for companies allows for a much more global risk management and a good identification of opportunities. As far as governments are concerned, their long-term sustainability tells us a lot about their long-term capacity to repay their debt. It is also an interesting risk management tool. Country risk first. But let’s not forget that companies operate in countries. Being aware of state and geopolitical risks is important.
Is it the same for emerging countries?
There are of course differences between countries that must be taken into account. But I think it is difficult to say that some countries can be classified as developed and some as undeveloped in terms of sustainability. In ESG, all countries are developing.
If intuitively one could say that it was not worth doing ESG analysis for emerging countries, an internal study clearly shows that an emerging universe without ESG filters performs worse over time than a universe with an ESG filter. Because these filters allow us to exclude risks that can be quite strong.
Our study also showed that in emerging equities, a downgrade in ESG rating was followed by a worse performance in the three years that followed. Regardless of the asset class, ESG analysis can add a lot of value in terms of risk management, in terms of identifying opportunities.
Read also
Is the lack of a universally accepted definition of ESG a problem for you? As is the constant evolution of the taxonomy.
I don’t think the lack of a universal definition is a problem in itself.
I think what is very important for investors today is to understand what the underlying methodology is that an asset manager, bank or other financial product provider is proposing. The methodology that has led to an ESG rating. And that professionals are aware that investors have their own definition of what a sustainable investment should be. A definition that is more visible than legal.
In this sense, the European regulation makes it possible to harmonise, or at least to give a slightly more harmonised reading of what is happening on the market today, in terms of ESG products and approach.
The taxonomy gives us an interesting reference point. However, it is aimed more at an ideal world in the future than at the current economic reality. If we look at the major stock market indices, we see that alignment with the taxonomy is very low, generally below 10%. The taxonomy alignment of a product or portfolio can be a focus for investors, but it should not be the only ESG focus. And this alignment will by nature be very low at this stage.
Read the original French version of this interview on the site