Emissions targets are
not as simple as they seem
If a fund manages ESG risk primarily through exclusion, that could be a warning
How can investors avoid greenwashing and implement ESG in their portfolios with integrity?
First, investors should be clear about their goals. What do they want to achieve with their ESG investments? Many funds say they manage ESG risk and market themselves as sustainable, but risk and sustainability are not always the same.
Think about COVID-19 vaccines. When governments offered to pay hefty prices for them, some companies took advantage of that opportunity and charged high markups. Investors may have found those companies appealing from a credit and risk perspective, but other companies selling their vaccines at cost were much better investments from an impact perspective.
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Preventing ESG risk and achieving sustainable impact are not always the same. Investors must be clear about their goals and take a holistic approach to risk management.
John Ploeg, Co-head of ESG Research at PGIM Fixed Income, explains how investors can avoid greenwashing, implement ESG with integrity, effectively analyse ESG in emerging markets, and evaluate a company's emissions targets.
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John Ploeg, Co-head of ESG Research at PGIM Fixed Income, on implementing effective ESG analysis with integrity
How can you effectively analyse ESG in emerging markets?
Always remember that you’ll find a lot of risks—and also a lot of opportunities—in emerging markets. In general, but especially in emerging markets, think about ESG holistically, not in a vacuum.
The war in Ukraine is a good example. It has sent food prices skyrocketing around the world and inflicted a lot of pain, especially in emerging markets. The last time food prices spiked this high, a number of emerging markets worldwide experienced significant unrest.
These ripple effects mean you cannot take a simplistic approach to ESG. Fund managers must develop effective processes for managing risk and relative value, and also for maintaining constant vigilance. They need to recognize the market’s warning signs and adapt to those situations quickly.
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How do you weigh a company’s emissions targets in your analysis?
Emissions targets are not as simple as they seem. It’s much more complicated than a company simply declaring a goal of net-zero emissions by 2050. To meet the terms of the Paris Agreement, many industries must reach net zero before 2050.
First, investors should determine if the target is rooted in science and what the methodology behind it is. Does the target include interim milestones to make sure the company stays on track? Has the company’s management offered a clear strategy about how to achieve these milestones?
Ideally, a company will have offered incentives for management to hit those targets. And you need to look at the scope of the targets. Do they address most or all of a company’s emissions? Or just a small subset?
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You don’t need to avoid all risk. The key is to understand the risks you take, manage them, and make sure you are adequately compensated for taking them. Many ESG funds manage risk primarily by excluding entire sectors like tobacco or casinos. While that might be good when considering impact, it might not be the best way to successfully manage risk. If a fund manages ESG risk primarily through exclusion, that could be a warning. Formulaic investing might look sophisticated, but simply checking a bunch of boxes is not actually thoughtful analysis.
Here are some important questions you should ask:
The first point to think about with ESG is what you want to achieve with it
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INTRODUCTION | Video Interview | ESG with integrity | Emerging markets | Emissions targets
Emissions targets
Emerging markets
ESG with integrity
Video Interview
INTRODUCTION
Does the manager have good ESG resources?
Are those resources separated into silos?
Are the resources embedded in the fund’s investment process or relegated to the sideline?
Finally, and this is tricky, can a manager clearly explain how they embed ESG into that process?
•
•
•
•
First, investors should be clear about their goals. What do they want to achieve with their ESG investments? Many funds say they manage ESG risk and market themselves as sustainable, but risk and sustainability are not always the same.
Think about COVID-19 vaccines. When governments offered to pay hefty prices for them, some companies took advantage of that opportunity and charged high markups. Investors may have found those companies appealing from a credit and risk perspective, but other companies selling their vaccines at cost were much better investments from an impact perspective.
You don’t need to avoid all risk. The key is to understand the risks you take, manage them, and make sure you are adequately compensated for taking them. Many ESG funds manage risk primarily by excluding entire sectors like tobacco or casinos. While that might be good when considering impact, it might not be the best way to successfully manage risk. If a fund manages ESG risk primarily through exclusion, that could be a warning. Formulaic investing might look sophisticated, but simply checking a bunch of boxes is not actually thoughtful analysis.
Here are some important questions you should ask:
• Does the manager have good ESG resources?
• Are those resources separated into silos?
• Are the resources embedded in the fund’s investment process or relegated to the sideline?
• Finally, and this is tricky, can a manager clearly explain how they embed ESG into that process?