From the campaigns against ozone-depleting aerosols in the 1980s to the popular “reduce, reuse, recycle” tagline of the 1990s, environmental causes have dominated sustainability conversations for decades.
While those campaigns succeeded in spreading awareness, they are insufficient for today’s world. The way Aditya Monappa sees it, the “3R” mantra needs a revamp to keep up with the times.
“Today, the tagline should include a new way of thinking,” says Monappa, who is AllianceBernstein’s head of business development for multi-asset and alternatives in Asia. “It should say ‘Replace, Reduce, Recycle and Offset’ [and in that order].”
While the original catchphrase was focused on recycling waste, the new actions target a more abstract enemy: carbon. “Replace” — to substitute a high carbon footprint with a low one — and “offset” carbon only as a last resort.
“Compared to the earlier campaigns, which were focused on individuals or consumers, today’s campaign is a shared responsibility among stakeholders that also includes corporations, institutions and governments,” Monappa tells The Edge Singapore.
Two decades on, there is also better awareness on the impact of human activities on the environment. Studies by the Intergovernmental Panel on Climate Change (IPCC) have concluded beyond any reasonable doubt that climate change is manmade, says Monappa.
Global warming has gone beyond a slogan to being an introducer of clear physical risks to businesses, he adds. Even transitioning to a lower-carbon economy today could bring risks of its own. “Governments [are] now belatedly trying to mitigate the worst effects of climate change.”
So, is the fight against climate change a lost cause? Not yet, says Monappa; the answer lies in how people, organisations and governments tackle carbon.
“Countries around the world are introducing carbon pricing schemes and taxes,” he notes. “The number one question you must ask is: ‘Is carbon taxed or priced?’”
Putting a price on carbon pollution is a means of bringing down emissions and driving investment into cleaner options. The economic tool foists the burden of carbon emissions onto those directly responsible.
ESG’s big impact
Despite present uncertainty, Monappa stresses that environmental issues are closely linked to investment returns. “When we do scenario analysis… these high-carbon emitting businesses [are] losing market share. We get significantly reduced future price targets on a number of financial assets. So, environmental issues are clearly material to investment returns.”
Sustainability goes beyond just caring for the Earth. Environmental issues may be the loudest rallying call, but social and corporate governance factors, too, are crucial considerations for asset managers, says Monappa. Together, they form the acronym “ESG” — three themes that form sustainable investing.
“Perhaps a lot of people associate ESG with the environment as its impact is more visible and it creates startling headlines,” says Monappa. “At AllianceBernstein, we factor not just the important ‘E’ but also the ‘S’ and ‘G’ issues into our investment decisions, because we know, like any strategic or business issue, there is a big impact on risk and return.”
“Looking back over the past year, think about the discovery of big frauds in large public companies — these were all huge failures of governance. Think about big oil spills in the past due to company negligence — these were not just environmental disasters, but financial disasters for investors as well,” he adds.
See: Businesses will benefit from sustainability disclosures, says vice-chair of climate-related task force
As an asset manager, AllianceBernstein is focused on conducting proper due diligence. “Our investment process considers ESG factors in the same light as we would treat any other risk or opportunity. If we neglect to do it, we would not be fulfilling our duty. It is values-neutral and all about delivering better outcomes for our clients,” says Monappa.
When looking at investments in an energy company, for example, AllianceBernstein considers the risks of carbon taxes or the prices of electric cars falling in a few years compared to petrol-based cars, says Monappa. “We need to consider these trends now versus when they actually transpire and factor these risks into our share price targets. Considering them in the future will be too late — those events will already have hit the share price of the energy company.”
AllianceBernstein’s investment teams engage the companies it invests in by creating ESG frameworks and defining methodologies. “The teams complement each other, working towards more informed decisions and better solutions for our investors.”
AllianceBernstein is also investing in scientific and academic research. In September 2019, the investment firm announced a first-of-its-kind curriculum focused on integrating climate science into portfolio management and construction in cooperation with Columbia University’s Earth Institute, located in New York City.
This April, AllianceBernstein became the founding member of the Corporate Affiliate Programme at the Columbia Climate School, the first purpose-built school of its kind in the world focused exclusively on tackling climate change and its related challenges. As part of the exclusive, three-year agreement, the two institutions will embark on a research agenda focused on significant climate-related challenges, such as the race to net zero emissions over the next 30 years.
Better returns?
According to Monappa, history has shown that integrating ESG can only help, not hurt, investment returns. “At AllianceBernstein, we have a firm belief that integrating ESG in our investment process actually improves risk-adjusted returns. It is this belief that leads us to do it in every equity, fixed income and multi-asset strategy that we actively manage.”
That said, ESG is not an investment style, but perhaps something closer to due diligence and forecasting. By looking beyond the usual market cycles or financial reports, asset managers like AllianceBernstein now have a holistic investment process that includes due diligence on ESG issues — immaterial factors that may pose material risks in the years ahead.
The best asset managers now consider ESG integration to be standard practice. “In a world where governments and investors everywhere are putting money to work and enforcing new regulations, it would be a mistake to not care about ESG,” says Monappa.
Individual investors who are keen may choose to enter a sustainable fund. But with more than 2,300 such equity funds worldwide, how does one choose where to begin their sustainable investing journey?
To do good and do well, investors should pick strategies that deliver on both purpose and performance, says Monappa. “A strategy that picks companies based on how they meet the United Nations’ Sustainable Development Goals could be a good way of defining ‘purpose’. These goals have been agreed on by 193 countries around the world, and because meeting them will cost about US$90 trillion [$120.75 trillion] by 2030, companies that offer concrete solutions to meet these goals are likely to grow faster than the market.”
Now, for a reality check, Monappa acknowledges that like every other investment, performance is paramount. “In line with this long-term view, we would advocate against investing in just one narrow sustainable theme. From our experience, a theme that is ‘hot’ in the short term often underperforms soon after.
“Finding balance is crucial, both in life and in investing, and that’s what a portfolio that does good and does well should be all about,” he says.
Photo: Nelia Phoon / The Edge Singapore
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