Bridgeewater's Macro Approach to ESG Integration

Social conditions are an increasing consideration for how the economy will be managed

What does Robeco expect in the world of sustainable investing in 2021? We remain focused on the two main elements of SI: integrating ESG into the investment process and active ownership. In our latest webinar, Masja Zandbergen outlines her views on the market outlook for SI and sustainable strategies.

With a federal government turn over to the Democratic party this year, hopes are high for a focused, comprehensive federal approach to tackling climate change, rather than the patchwork state approach of the past administration. President Biden has consistently highlighted the climate crisis as urgent, and the team of advisors he has assembled on the issue demonstrates his commitment.

S&P Global has published its annual yearbook showcasing the sustainability performance of the world’s largest companies. Over 7,000 companies were assessed as part of the 2020 S&P Global Corporate Sustainability Assessment (CSA), which resulted in 70 gold class, 74 silver class, and 98 bronze class medals being awarded to companies in the Sustainability Yearbook 2021.

Integrating sustainability into investments will become much higher profile under new EU regulations that take effect this year. Coming into force over the course of 2021, the EU’s Sustainable Finance Action Plan represents one of the most impactful pieces of regulation to hit the investment management industry since MiFID II beefed up reporting and transparency in 2018.  A core tenet of the plan is the Sustainable Finance Disclosure Regulation (SFDR), which will classify investment funds according to their sustainability credentials for the first time.

The election of Joe Biden as America’s 46th President is just one more important signal that change is imminent, for energy markets and the broader economy. With the world aligned and committed in the fight against climate change, the global movement towards a sustainable energy supply is gaining considerable momentum.

Proxy voting is a powerful tool for shareholders to steer corporate agendas towards sustainability-focused decision making. Despite the increased attention to the integration of sustainability in investment solutions, asset managers generally vote against environmental and social proposals. This trend is more pronounced among large and passive players.

The title says it all. In The Big Book of SI, we analyze sustainable investing today and examine the trends that will shape our future. This new publication also gives investors guidelines on implementation, includes interviews with experts and client cases, and highlights the link between ESG integration and performance. All that in just 102 pages.

Bond issuers—including sovereigns, who represent 50 percent of the fixed income asset class—are faced with increasing scrutiny on environmental, social, and governance (ESG) issues from investors. Forums organized by the World Bank Treasury to promote dialogue between institutional investors and sovereign bond issuers have highlighted the challenges sovereign issuers face in engaging with investors on ESG topics and in communicating ESG-related information that investors consider financially material to their portfolios. This document provides examples, best practices, and action plans that can help debt managers enhance their capacity to engage with investors incorporating ESG information in investment decisions.

For decades, we have engineered scalable portfolios to help institutional investors achieve their goals. In the past, these goals have typically been financial (eg. return and risk targets), but now many investors are also seeking to achieve environmental and social impacts through their portfolios. We believe the best way to achieve both financial investment goals and these impact goals is through portfolio engineering that incorporates these objectives holistically, beginning with crisply defining an investor's goals, systematically looking across a variety of asset classes to find assets that are aligned with these goals, and then combining those assets to create a portfolio that is designed to achieve a high ratio of return to risk.

We are now at a turning point, with Democrats controlling both legislative chambers and the presidency, and an emerging concensus among Democratic policy makers and their advisors that enables fiscal spending that is both significant in size and ambitious in scope. Later this year, we expect to see the first expansionary fiscal package centered around the pursuing long-term social, environmental, and competitiveness policy goals (following the more immediate COVID recovery package). In these Observations, we explore two key shifts in Democrats' thinking underlying these policy proposals, which we expect will be sustained well beyond this fiscal package.

The ultimate goal of economic policy is simple and timeless - to ensure prosperity and maximise living standards. Broad macroeconomic measures such as GDP growth, the unemployment rate, and inflation had for decades been a good proxy of rising prosperity, so they have dominated economic policy making and are enshrined in most central bank mandates. But even before the COVID-19 crisis, it had become clear that traditional economic measures have increasingly diverged from social outcomes.

Over the past two decades, China's secular rise dominated commodity markets, as its industrialization required a massive amount of raw materials to build up the country. As we consider the future, we see many reasons to be bullish on commodities tactically, but one of the most important secular factors will likely support industrial commodity demand for years to come: the shift in global economies away from fossil fuels and toward greener energy.

Throughout its history, the U.S. domestic Asset Management Industry, projected by PwC to grow to $71.2 trillion in assets under management by 20251, has exhibited an empirical lack of diversity with respect to gender and ethnicity within its ranks. Numerous studies have shown that Women and People of Color (“POC”) are underrepresented in the Industry, including a 2019 study commissioned by the Knight Foundation finding that Asset Management firms owned substantially or majority-owned by Women or POC managed only 1.3% of the Industry’s total assets under management.

2020 underlined just how closely connected the world is. The pandemic broke out in a market in China but quickly spread to the rest of the world. The health crisis soon escalated into a serious economic crisis – a crisis of which we still do not know the full consequences of. Being able to act quickly and safely in a changing world is more important than ever. Many of PensionDanmark’s members and companies have endured periods of lockdown, and jobs have been lost as a consequence. The hotel and restaurant industry, the transport industry and the many employees at Denmark’s airports have been particularly hard hit. Many of the companies that were not shut down had to implement restrictions and other measures to protect themselves against COVID-19.

The incorporation of ESG factors within the investment process has evolved from a nice-to-have to a necessity. Client demand has grown strongly, with 68% of the PRI’s asset owner signatory base addressing ESG considerations in their requests for proposals (RFPs). This means that many asset owners expect investment managers to include financially material ESG factors within their funds and investment strategies. In addition, policy makers around the world are introducing regulatory requirements for both investment managers and asset owners to disclose and report on responsible investment practices.

A growing number of asset owners now expect their investment managers to incorporate ESG factors into their investment processes. This means that ESG needs to be at the core of the relationship between the asset owner and the investment manager – and that ESG considerations need to be addressed at every stage of that relationship, from setting the initial investment strategy, to drafting requests for proposals, to selection, appointment and monitoring.

Asset owners increasingly include ESG considerations in their investment management agreements (IMAs) and other legal documentation. More than two-thirds (69%) of PRI asset owner signatories typically implement ESG requirements in contracts such as IMAs and limited partner agreements (LPAs).1 To ensure that investment managers abide by their clients’ ESG requirements, certain legal aspects are becoming standard features of the asset owner-investment manager relationship.

With fiscal policy now the dominant lever supporting growth in most economies, it has become even more important to understand how the various fiscal policies will flow through to GDP, inflation, and different markets. We have been working to get our understanding of fiscal policy to the same level as our understanding of monetary policy. This is a difficult task, as fiscal comes in so many forms, each having different implications at the macro and micro levels. Some policies can be clearly counter-cyclical (the best of these are typically direct checks and shovel-ready infrastructure), while others aim to address more structural problems (like low productivity or environmental issues) but are less effective cyclically, as they are typically longer-term.