“Sustainability doesn’t stand still”
In its investment approach, BLI - Banque de Luxembourg Investments S.A. regards equity investments as long-term participations in companies. That is why BLI fund managers constantly seek first-class companies that enjoy clear competitive advantages, that are highly profitable, and that are able to generate recurrent free cash flow. Such companies are able to achieve long-term added value for their shareholders. For our fund managers to develop a comprehensive view of the companies they are considering, they consider non-financial criteria in addition to financial research. Since today comprehensive quality ESG research available, BLI has in recent months set guidelines for integrating non-financial criteria into its investment strategy. Here are four questions for Thierry Feltgen and Julien Jonas of BLI’s ESG team.
In July 2017, BLI - Banque de Luxembourg Investments S.A. signed the United Nations’ Principles for Responsible Investment (UN PRI). What made BLI take this step, and what is your assessment so far?
Thierry Feltgen (TF): BLI - Banque de Luxembourg Investments didn’t wait for summer 2017 to take an interest in sustainable investing. Since 2008, BLI has been offering BL-Equities Horizon, a fund that focuses on responsible investment and sustainability. Until October 2018, fundamental sustainability research as well as the definition of the fund’s investment universe were outsourced to an external firm, but this arrangement failed to meet our quality standards for the long term.
In October 2018, the structure of the fund has been reviewed. It is in the process of being relaunched as BL-Sustainable Horizon: while it remains a pure socially responsible and sustainable fund, the big difference is that going forward; companies eligible for the portfolio are identified by the fund manager himself. This step was made possible by the emergence in the past few years of increasingly robust external primary research, which have allowed us, as a rather small company, to pick up raw information and process it based on our own methodology.
Indeed, in recent years investor awareness of this important issue grew significantly. They justifiably want to know how and where their money is being invested. This is especially true of investors from Nordic countries.
As we implemented the United Nations’ Principles for Responsible Investment (UN PRI) at BLI, we felt it was very important not just to pay lip service to the principles, as some companies used to do. We really wanted to take a step further and from the outset understood the UN PRI as a standard bearer. The United Nations have recently toughened the criteria so that it is no longer enough for signatories to just report on the company’s ESG activities. Signatories will now have to make steady progress in integrating the Principles in their activities. Standing still or taking a step back is no longer an option. In addition, signatories must commit to managing at least 50 percent of their AuM in accordance with ESG (environmental, social and governance) criteria.
In the context of the implementation of the Principles at BLI, we have developed in less than one year an ESG investment strategy that we use in all our equity portfolios. Our concept is built on four pillars: controversies, sector exclusion, proxy voting at shareholder meetings and engagement with companies.
What exactly do these four pillars entail?
Julien Jonas (JJ): The first pillar of our ESG approach relies on controversies. We use the MSCI ESG Manager databank to scan for corporate controversies – i.e. solid publicly available information about companies. These range from rather harmless issues, such as an incomplete reporting about a company’s board membership, to very serious matters, such as bribery of public officials. If there is a risk that a company is repeatedly entangled in serious controversies, we have the option of excluding it from the BLI investment universe.
Likewise, as a matter of principle, BLI does not invest in companies that are involved in controversial weapons, such as cluster bombs, anti-personal mines, land mines, depleted uranium, and biological and chemical weapons. This corresponds to the second pillar.
The third pillar is based on proxy voting. This means that we have hired an external service provider who exercises our shareholder voting rights at annual general meetings and to represents our interests, which we have laid out to them beforehand.
BLI’s fourth pillar involves engaging with the relevant companies on ESG issues and controversies in case this should be warranted.
There is a fifth point, which is not a pillar in itself since we do not actively target this metric. In our Business-Like-Investment approach, we prefer companies with low capital-intensity. This means that our equity portfolios tend to achieve a lower CO2 intensity than relevant market indices – meaning that they are more CO2 efficient. Unlike the CO2 footprint, which measures a company’s CO2 emissions in absolute terms, CO2 intensity combines this metric with a company’s revenues to produce a data point that makes it possible to compare a company’s CO2 efficiency with that of other companies.
How do you implement these standards in the individual fund portfolios?
TF: Controversies are assigned a colour code based on the MSCI ESG Manager databank. A red flag denotes the most serious controversies. This could relate to companies with corruption scandals or companies that neglect their employees’ occupational safety, that exploit their workers or that try to prevent the establishment of trade unions. Our ESG investment policy requires that such companies be excluded from our investment universe. If a company that is in our portfolio becomes embroiled in such a controversy, the fund manager has three months to close out the position. Should he wish to hold on to the company he may submit his case to BLI’s ESG committee. If the majority of the committee is convinced by his argument, the position may remain in the portfolio. However, the interested fund manager is not allowed to vote on the decision.
The above examples have in recent months involved three companies in which we were invested. After the emergence of these controversies, the companies were removed from our portfolios.
What are you working on now? What is your outlook?
JJ: At the outset, we set up our responsible investment policy for our equity investments. We are currently working on a comparable ESG policy for our fixed-income strategies. This is proving to be a big challenge, especially for government bonds: you need to bear in mind that while governments provide legal frameworks and pass laws they also maintain armies.
Fixed-income investments do have one key advantage over equity investments. Unlike listed equities, it is possible to invest directly in real-world projects via specific bonds. Green bonds are a good example. These bonds are issued to fund a particular “green” or social project. Microfinance investments go one-step further in terms of impact investing. Unlike government bonds, which fund governments (the top of the social pyramid), microfinance loans support the bottom of the social pyramid. They provide credit to poor people, who have no access to the banking system, for use in setting up their businesses or small companies. This last approach makes it possible to directly address the United Nations’ sustainability goals, for example in reducing poverty.
In the course of defining BLI’s ESG strategy, it quickly became clear that the “sustainable investment” theme is not static. It is on the contrary a long-term process, an ongoing confrontation with an ever-evolving complex theme. Our challenge is to be nimble and to steadily expand the sphere of action of our ESG strategy. In doing so, it is very important to include all stakeholders at BLI – portfolio managers, investors, communication and distribution staff, etc. – so that sustainable investing has broad backing. In particular, we have laid out the objective of being constantly transparent and clear about what we do, to show what we have already implemented, and what areas still require action.