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Refinitiv Sustainability Perspectives

Explore bi-monthly episodes where we feature the key industry leaders sharing insights about sustainable business, responsible finance, and green economy. Available in audio, text, and video formats. 

Episode 76

Episode 76: The Market Correction Possibility & ESG Investing

Published on: September 20, 2021 • Duration: 24 minutes

Welcoming back our first ever podcast guest, Nikita Singhal, who is the Co-Head of Sustainable Investment & ESG at Lazard Asset Management. Nikita oversees the firm's ESG integration strategy and co-chairs the firm’s ESG Steering Group and sits on the firm’s Proxy Voting Committee. She also leads client engagement and thought leadership on ESG topics.

We're hearing a lot about the possibility of a market correction in the near term - what does this mean for ESG investing and what are the effects on ESG portfolios? What do investors need to think about, especially in this low-yield environment?

Host: Keesa Schreane

Guests: Nikita Singhal, Co-Head of Sustainable Investment & ESG at Lazard Asset Management

  • KEESA

    We're hearing a lot about the possibility of a market correction in the near term. Now, what might this mean for SGN?

     KEESA

    How have ESG portfolios performed when there is softening or transitory trend and what do investors need to think about today, especially in this low yield environment?

     KEESA

    We're here to discuss this and answer some of these questions.

     KEESA

    Is Nikita Singhal, Nikita is managing director.

    Co head of sustainable investment and ESG at Lazard.

    She is also a friend of their Refinitiv Sustainability Perspective podcast and was our very first interview E two years ago, so we gave you a special welcome back Nikita.

    Thank you for joining us.

    So loads to catch up on here. As I mentioned, there's quite a bit of talk around the expectation of a market correction as we head into Q4. Just how resilient can we expect ESG funds to be in this market?

     NIKITA

    That's a great question, and I would frame it kind of across three pieces.

     

    One is coming back to the definition of ESG, which you know as you know there are so many definitions about in this relatively nascent.

     Keesa

    You know industry at least nascent compared to the history of financial markets.

    So we'll talk a little bit about that.

    The second is because of its definition.

    It's the relevance of ESG across market cycles and investment styles.

    So for example, growth and value and lastly recent empirical studies to support this hypothesis and so starting with the definition really, it really depends on when we talk about.

     Keesa

    ESG often people use different definitions at Lazard Asset Management.

     Keesa

    We define ESG as the.

     Keesa

    Systematic incorporation of environmental social governance risks and opportunities, and to try and understand how these environmental social issues are getting priced into the market to try to price them in before the market prices them in before its consensus and therefore ultimately improve investment outcomes for our clients over a long term.

     Keesa

    When that is the definition of ESG, then it's not about a specific market cycle.

     Keesa

    A bowler bear market, a specific style, whether your growth or deep value or relative value, but much rather about finding ways to think about in a in a bottom up fundamental way how a specific environmental or social or governance.

     Keesa

    Issue is impacting the investment you're looking at and and this the research actually supports this so you see longitudinal research studies showing how companies who have who score high on certain sustainability attributes have actually outperformed over others in the long term.

     Keesa

    The most popular.

     Keesa

    Study I read about these days is by Gunther Frieden, the Journal of Sustainable Finance and Investment. And this is going back to 2016.

     Keesa

    So it's not just you know in the in the recent years where there was meta analysis of more than 2000 studies of the impact of high ESG ratings on corporate financial performance.

     Keesa

    And that showed, you know, over a 63% positive coral.

     Keesa

    There's similarly other studies in the Journal of Applied Corporate Finance, showing that that by removing the bottom 10% or 25% of companies by ESG ratings, you could.

     Keesa

    You could have a portfolio yielding higher returns and and having lower risk.

     Keesa

    Similar studies have been done by index providers like MCI to demonstrate.

     Keesa

    How ESG fund performance can be quantified and how ESG factors can cumulatively contribute to almost 2% of the top 20 ESG funds returns over the last 10 years.

     Keesa

    But the question that you asked is really, you know what happens when there is a market correction and interest.

     Keesa

    I mean, we have had a bit of that in the last two years, and so there's there has been research that was conducted in the times of recent market turbulence. So as an example, the S&P global market intelligence found that funds investing in.

     Keesa

    Companies based on their ESG ratings are quote unquote, relative safe havens in economic downturn.

     Keesa

    And what it did was it analyzed the performance of 17 ESG focused ETFs and mutual funds and that have more than 250 million in assets through that turbulent period of January through May 15 of last year and all but three outperformed the S.

     Keesa

    And P5.

     Keesa

    100 which you know is widely considered one of the better best representations.

     Keesa

    A lot of people when they discuss ESG performance, and I'll pause here, have have attributed the recent success and kind of outperformance of ESG strategies to sector exposures, specifically, the tendency to be underweight energy, especially fossil fuel extraction and being overweight technology and and I think it's worth just a.

     Keesa

    As a final point, kind of debunking this notion.

     Keesa

    And there is a recent academic study by Harvard Business School by professor at Harvard Business School that found that companies who responded to the current pandemic with a greater focus on stakeholders.

     Keesa

    Including once employees and your supply chain partners actually saw better returns during the 2020 market correction.

     KEESA

    I definitely can appreciate the thought about focusing on stakeholders and really looking beyond the typical lens that we look through, but exposing as you say.

     KEESA

    Employees and also looking at suppliers there. I'm curious Nikita taking a step back into those SuccessFactors. Some people believe it has to do with sector exposure.

     KEESA

    Other people really point out that when there is a tilt toward ESG, understanding the risks and the opportunities.

     KEESA

    There that there can be still apple generation.

     KEESA

    I'm wondering in today's environment, in this low yield environment and it's a low yield environment so many places.

     KEESA

    In context of G, let's think about the significance of Europe, where there is a lot of traction around green bond issuance.

     KEESA

    How can a manager build a basket where green bonds sustainability linked bonds are the focus for them in this type of environment where there are so many regions that are experiencing a similar.

     KEESA

    Low yield environmental opportunity.

     Keesa

    Yeah, great question and the way I would frame that is.

     Keesa

    I really think that if you if you call it green, conscious investing or investors who proactively want to invest in in in fixed income instruments that have exposure to this low energy.

     Keesa

    The low carbon transition that the world is expected to go through.

     Keesa

    Either from it from a personal motivation standpoint, or from an understanding that.

     Keesa

    This is where the world.

     Keesa

    Is headed and and credit may be impacted by.

     Keesa

    But we really believe at Lazard Asset Management that green conscious investing really requires skilled active management, and I'll tell you why.

     Keesa

    Coming to, you know your question about the first and foremost is because of that interest rate exposure that you spoke about spoke of the the composition of the green bond universe.

     Keesa

    It offers a pretty helpful example of.

     Keesa

    How interest rate exposure, for example, can impact passive ESG strategies by focusing only on labeled green bond issues.

     Keesa

    We may be overexposed as we may overexpose an investor or a client of ours to unintended interest rate.

     Keesa

    Risk and passive passive investors in particular could end up being more exposed than they bargained for to Europe's low and negative prevailing interest rates.

     Keesa

    So if you just look at the green Bond universe today, European issuers account for almost 40% of the value of green bond issuance since 2007 according to this is, according to the climate.

     Keesa

    Bond initiative and over 60. I think it's about 64% of the bonds in the Barclays Green Bond Index are issued.

     Keesa

    In euros, so that's you know by by just selecting green bonds, that's.

     Keesa

    Those are some of the.

     Keesa

    Issues that you can run into, which leads me kind of to.

     Keesa

    My second point is that you could still do this in in a genuine a way while still achieving your risk return objectives by not missing out on unlabeled bonds.

     Keesa

    Passive green bond investors.

     Keesa

    They tend to miss out on these.

     Keesa

    Out fixed income investments there.

     Keesa

    There are fixed income investments that may not be labeled officially as green or social bonds.

     Keesa

    But there are many that provide options for achieving that diversification.

     Keesa

    Being able to source yield, and managing duration all within while trying to achieve.

     Keesa

    Also, you know a sustainably conscious portfolio, so it is very much possible, but you need to have a an investor and asset manager who can do that bottom up due diligence both on the on.

     Keesa

    On the credit side, but also on the sustainability side to be able to vet that the use of proceeds of these bonds makes sense.

     Keesa

    It's in line with the overall objectives of the enterprise that's issuing the bar.

     Keesa

    And that kind of leads me to my last point, which is you need active management to untangle the current greenwashing challenge that that we are all facing.

     Keesa

    Many issuers, both corporate and sovereign issuers around the world.

     Keesa

    We feel sometimes they're paying lip service to environmental consciousness without really any meaningful results.

     Keesa

    You see this with certain oil majors or utility companies that tout their investments in renewable energy, for example, but they as an entity as an enterprise may still be vulnerable to the stranded assets problem as the world transitions towards cleaner sources of energy.

     Keesa

    And so we believe that the best active managers actually tap into this into their in depth fundamental research to determine which issuers are serious about sustainability and which army reek merely kind of trying to ride the wave of this pro environment sentiment.

     Keesa

    One example is our global fixed income team at Lazard, which purchased its first green bond.

     Keesa

    In 2015, and more than 20% of that portfolio today is invested in labeled green social and sustainable.

     Keesa

    Ones, but far beyond that as I described, there is an attempt to try and unlock, you know, opportunities both on the sustainability and yield side to to look at unlabeled bonds and to try and.

     Keesa

    Strip away the.

     Keesa

    Wheat from the chaff in terms of.

     Keesa

    The the the.

     Keesa

    Sustainability claims that a lot of issuers have versus.

     Keesa

    Those that have.

     Keesa

    You know, really legitimate use of proceeds, many of whom you know, have proceeds that are earmarked for certain qualified projects which we really like, and and and some of which are even, you know, have second party opinions on on the issuance.

     Keesa

    These are from firms like Cisero, Sustainalytics, and Vizio, which are all in compliance with the.

     Keesa

    The ECMA green social bond principles.

     Keesa

    So that's something.

     Keesa

    That we would we would advocate.

     KEESA

    More so, and this is great.

     KEESA

    I appreciate the thought about the pro environment sentiment and I think that cost is we're talking about bonds now, but we can also look at equities and really look at what's going on in a couple of specific sectors.

     KEESA

    Now I'm thinking about the oil and gas sector and the transition toward.

     KEESA

    Renewable energy. I'm wondering specifically now is we're getting closer to COP 26. What types of expectations may be set for oil and gas and renewables? And do you think that we should expect specific outcomes after COP 26 in that sector?

     Keesa

    Yeah, I mean this is a very tricky question.

     Keesa

    I I I'm tricky as I mean I could say complicated and challenging and I certainly don't have a clear answer, but I what I can present.

     Keesa

    To you is.

     Keesa

    The you know potential arguments on both sides and and and and the challenges that I think I see unfolding with as countries make increase.

     Keesa

    And ratchet up their commitments, their nationally determined contributions. You know. Just today, I saw a report out by our energy analyst talking about how energy prices are like. Almost 8% of world GDP.

     Keesa

    And this is driven primarily by a 26% plus increase in Asian LNG prices. This is probably only the second time that this has happened since 2008, and energy prices are at 87% above the two year moving average. This could have a major destabilizing effect. You know, impacting credit impacting.

     Keesa

    Counterparty risk, and even at a societal level, destroying disposable income budgets for for homes.

     Keesa

    And all of this is happening and against.

     Keesa

    The backdrop of.

     Keesa

    Cop 26 that which is, you know a meeting held for the members of the Paris Agreement to come back.

     Keesa

    And as I said, ratchet up their agreements.

     Keesa

    There are some very positive things that have happened in the world in the last 10 years.

     Keesa

    The the recognition of the urgency of climate change.

     Keesa

    And and this is, you know, with the recent IPCC report, the Intergovernmental Panel on Climate Change, it has become even more urgent to quickly try to decarbonize our economies.

     Keesa

    And we've also had real technological breakthroughs, so governments are recognizing the urgency. There is an ability to actually significantly increase growth, global renewable energy, power capacity, and this is on the back of the cost effectiveness now of renewable technologies. You know almost a 89%.

     Keesa

    Drop in solar energy and 70% drop in wind energy costs since just 2009.

     Keesa

    So very some very positive factors, but on the back of it this transition that is inevitable in many ways is going to result in dislocations and particularly what I am concerned about is how do we make sure that this transition that is increased.

     Keesa

    You know it is is inevitable and we are trying to figure out what's the.

     Keesa

    Quickest time horizon over which to have the transition as a planet that it is just and we don't have situations you know across emerging markets.

     Keesa

    But even in developed markets you saw this just a few years ago with the Jean Movement and.

     Keesa

    France, if there is pressure to transition our economies at a very quick pace a there is a there's quite a like there's quite a chance that the inflationary effect of trying to transition economies quickly will fall to the people who can't afford it at all.

     Keesa

    And and you see that in the rising costs of commodities.

     Keesa

    In fossil fuel commodities already, so it's a really delicate balance.

     Keesa

    I think that I I really like to follow the work of the inevitable policy response.

     Keesa

    This is a project that.

     Keesa

    Is it is an aim to help prepare institutional investors like us at Lazard for portfolio risks and opportunities?

     Keesa

    So anyone interested in that, I would highly recommend they take a look at the at the inevitable policy response.

     Keesa

    This was commissioned by the PRI, the principles for responsible investing in 2018, and it's led by two firms that.

     Keesa

    David Economics and the energy transition advisor.

     Keesa

    But but they've done work to try and understand under the back against the backdrop of the urgency to respond to climate change and to try and mitigate some of that.

     Keesa

    The highest probability risks of climate change unfolding over the next.

     Keesa

    Even you know medium to long term, not just a 20 year horizon, but just in the next 10 years.

     Keesa

    What is the expectation of the next wave of announcements for net zero?

     Keesa

    So they predict that the United States.

     Keesa

    As well as countries like India and Australia will announce their net zero emissions targets by as early as 2023.

     Keesa

    They have pretty similar projections for carbon pricing, where where they they predict that carbon border adjustment mechanisms which are already being heavily discussed, and I suspect.

     Keesa

    Will be a big part of the cop. 26 discussions. Uhm these see bands from tier one countries are likely to put pressure on other countries to implement more ambitious carbon pricing.

     Keesa

    And then, most notably the impact on.

     Keesa

    Coal, I mean we were.

     Keesa

    Talking about oil and gas, but really.

     Keesa

    With with cold.

     Keesa

    Coming under new unabated coal, largely becoming UN investable, you know, by 2025 in almost all countries and how several several states even in the country like India which is so dependent on coal, almost 73% of generation in 2018 was on what came from coal has had states.

     Keesa

    Like good Roth and shut these good that have set the objective to end new coal generation.

     Keesa

    So I just kind of would summarize this where it is, you know a very complicated equation to try and understand what exactly the the direct impacts are going to be.

     Keesa

    But as.

     Keesa

    Fundamental bottom up investors.

     Keesa

    Our goal is to make sure we try and have a probability adjusted view of what's likely to happen in the world in terms of regulation and this kind of inevitable policy response against the backdrop of how companies are responding to them and how resilient they're going to be so very.

     Keesa

    Very exciting and it's it's times.

     Keesa

    Ahead I I would say.

     KEESA

    Excellent, what a great point to end on so we don't just talk about sectors and industries here, but when looking at mitigating climate change there are practical realities and tradeoffs as it relates to the decarbonization of the economy.

     KEESA

    When we look.

     KEESA

    At regions emerging countries, emerging economies, and what they're being asked to do in context of the resources that they have.

     KEESA

    Also very clear defining what ESG is and really sticking with that definition, the one that you gave to us.

     KEESA

    Nikita, the systematic incorporation of environmental, social and governance risk.

     KEESA

    And opportunities in understanding how these environmental and social issues are priced into the market using that information to improve investment outcomes for your clients long term and really at the end of the day, it's all about finding ways to think about those ESG issues, how they impact the investments that you're looking at.

     KEESA

    And really, looking at the possibility of in all markets in all types of environments, including the one we're in now, how ESG can help?

     KEESA

    An investor to outperform the market and great information.

     KEESA

    Great background and data that you gave us around how ESG can be used to help outperform and generate alpha.

     KEESA

    As always, Nikita single.

     KEESA

    Thank you so much.

     KEESA

    Nikita Singhal from Lazard.

About this series

The world is changing, and so is the financial sector.

As modern society goes through significant changes, the role of business and investment starts to evolve. It’s not something that’s just about to happen: it’s the reality surrounding us.   

What defines success in this world and our future? In this podcast series, we look at how industry experts create investments and build businesses that not only generate wealth but also produce  positive impacts on society and the planet.

From ESG investing, to sustainable finance and social impact in our communities, the Refinitiv Sustainability Perspective podcast aims to leverage data and intelligence to make the best business decisions possible.  

With the help of experts from the leading global organizations, we are going to dive deep into the world of sustainability. Are you ready to start?

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