“Most clients would consider ESG investments only if such investments are expected to enhance returns. There are organisations, of course, that are willing to take on ESG investments even if that does not enhance returns but they would be doing it for ideological reasons. This is what we call “impact investing”, which is a positive selection process, where the investor will look for investments that has a social, economic and environmental outcome/impact. But you cannot expect this from a pension fund whose trustees have the sole fiduciary responsibility to the members of the fund to protect their savings,” comments Anastasia Anastassiades, an associate partner at Aon in Nicosia.
Anastasia Anastassiades is an associate partner at Aon in Nicosia. She graduated from the London School of Economics and Political Science with a BSc (Hons) in Actuarial Science. She is a Fellow of the Institute of Actuaries in the UK and has 20 years of total consulting experience. Anastasia joined Aon Hewitt in 2010. She is the lead Investment Consultant for a number of pension funds and Insurance companies, here in Cyrus and abroad, which she advises on strategic investment matters and implementation as well as providing general investment related support.
“When working with clients, the first distinction we must make is whether the clients take it upon themselves to implement ESG, or whether they outsource this to the asset managers engaging only with those who have embedded an ESG process. Most provident fund trustees do not feel that they can implement ESG on their own.
If a client decides to embrace ESG, there are different levels of doing this.
The first level is what we call “Socially responsible investing”. It’s a selection process whereby you screen out “negative” stocks, meaning stocks that have unethical aspects to them like pornography, or private prisons, relating tp Iran or Sudan, fossil fuels, companies that are involved in bribery, tax evasion etc.
There are easy ways of doing this, by investing in ESG screened funds.
So it’s very easy to just buy a “screened” fund, and this is how most of the clients start”
But it’s possible to go much farther in ESG taxonomy, Anastassiades says.
“The second step, it’s a bit more of a “positive” selection process. So it’s not just negatively screening out “bad” investments, but incorporating an ESG integration – it integrates specific environmental, social and governance criteria into the investment analysis but again to the extend that this is material to the investment performance.
This means dropping (or even shorting) companies from a portfolio with negative ESG issues, but then also finding and investing more in companies that have good ESG score, or which make socially useful choices.
Up to this level, clients make ESG investment choices that are expected to enhance returns. There are organisations, of course, that are willing to take risks on ESG investments that may not enhance returns necessarily. We see that many clients don’t necessarily look at ESG investing with an eye strictly to do the right thing. But international and local pressure has made it absolutely necessary, along with new regulations.
On 8 March 2021, the Cyprus Securities and Exchange Commission (CySEC) issued a statement in which it made a commitment to fostering compliance with sustainable finance standards, in accordance with the EU action plan for financing sustainable growth. This is in line with EU Directive 2016/2341 which sets ESG criteria for pension funds, and which Cyprus transposed into national law 10(I) 2020.
Some clients, however, go well beyond regulatory compliance and social pressure in their application of ESG.
“At the next level is what we call impact investment, which is a selection process, a positive selection process, where we look for investments that have both a positive investment return, but also a social, economic and environmental outcome. So that’s quite an important distinction for us. This would mean finding investments in alternative energy or micro funding, minority-owned business, things like that.
And then, of course, there are companies and investors whose goals prioritise doing good above investment returns. We call this mission-related investment; it’s your mission to contribute to the greater good, to make a change in the world and thus investing in companies that complement the your mission.
This means investing in health care or senior issues, or child issues, etc. Among our clients, however, going all the way to impact investment is quite difficult. And it’s probably not their job as they are guardians of members money. So most of them stay in the first two categories that I mentioned, the one is negatively screening out companies and the other one involves positively and negatively selecting companies.
To attain these goals, we advise them on choosing a manager who understands their objectives, who will implement this in in a professional way. And they usually integrate that into what they call their statement investment principles, so that the next generation of administrative committees will follow suit.”
Indeed, one should not forget that most clients do expect good returns on ESG investment.
“It’s much more a question of selecting ESG-compliant stocks/funds that offer a good return, ideally a better return than they had been getting before. Some companies have already, for some years, been active in screening out negative stocks. .”
Generally speaking, available studies suggest ESG’s impact on performance has been neutral to positive as a result of negative screening. It is important to note, however, that these studies have been conducted over a relatively short period of time – less than a full market cycle, and primarily in a bull market environment
There seems to be consensus that ESG investment not only does good, but returns should do better than other investment choices as they are more sustainable in the long term.
Anastassiades thinks this view is somewhat premature.
“Obviously investing for impact will eventually have a good return (maybe not for years). And if a company is unable to sustain its resources, it is unlikely to make a profit thus sustainable companies will prevail. But this is a very long-term view. In the shorter term, it’s not been that clear that increased returns are coming through ESG investment. We will just have to wait a fairly long time to see these results.
There is clearly progress to be made, in both understanding ESG and in putting it into practice.
I think most people understand the green energy part, and are increasingly coming to support it. But there is less understanding of the need to support other ESG investments like minority-owned businesses, or child issues, or senior citizen issues. They understand those less, not because they are complicated concepts , but because they simply haven’t paid attention to the S & G (‘social’ and ‘governance’) parts of the ESG and mostly focused on the “E” (‘environmental’).”
And what about Cyprus? Are we seeing progress here?
“We are not doing badly. Compared to other EU countries, I think we are lagging behind a bit. Compared to the rest of the world Europe is doing better. There is still some progress to be made. There are some very good investment managers in Cyprus, and many companies are moving forward with the ESG agenda.”
With all this impressive change and transformation underway at all these pension funds and companies, do you feel ESG is making a difference?
“I think it is a very good thing. Pension funds are among the biggest players in the investment world. And the inclusion of ESG into their process of making investment choices is a very, very positive thing. It will have a big impact in the future. It is a slow process, but we are getting there. Most of the people in the industry have engaged in the green energy part of it as mentioned before. We still need to see more engagement in the social aspects of ESG directives. And I think the pension funds, given that you save for your own retirement, will become more of a sensitive to ESG issue. As this change in mindset comes, and people engage with ESG to have an impact, it will make a difference in the implementation of ESG, and that is only going to be very good for everyone. It is a growing trend, driven both top-down and bottom-up demand.”
