Transferred to responsibility
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"The 2020 Black Swan, the coronavirus, has had a major impact on investment approaches. An increasing number of investors are giving preference to companies that meet the requirements for sustainable development. The trend has also affected Russian investors, so management companies and banks are actively offering products that meet such requirements. However, so far they are interesting only to wealthy investors who are not chasing fast earnings.
The perfect storm, which this year has pleased the world economy, will inevitably lead to its contraction. This is evidenced by numerous studies, as well as surveys of professional investors conducted monthly by the Bank of America (BofA). According to them, almost all managers expressed the view that in the next 12 months a global recession is inevitable. There has never been such negative sentiment. Even during the 2008-2009 crisis, there were fewer pessimists: ‘only’ 86% of managers expected a decline in the global economy, which ended up being symbolic 0.1%.
The pessimism is understandable: because of the rapidly spreading coronavirus infection in the world, many countries have closed borders and restricted the movement of their citizens. This led to a drop in consumption and the shutdown of many industries. According to Fitch analysts, global GDP will fall by 3.9% this year. This decline will be the strongest since World War II. As a result, global economic revenues this year will be reduced by $2.8 trillion compared to the previous year and by $4.5 trillion compared to the forecast for 2020 before the pandemic. "No country or region has escaped the devastating effects of the global pandemic on its economy," the agency's analysts say.
Under such conditions, it is not surprising that international investors are aggressively reducing their investments in stocks. In April, the number of managers, in whose portfolios the weight of stocks was lower than the indicative level, was 27% higher than the number of those who had it. At the end of last year the situation was opposite: there were one third more optimists than pessimists.
However, investors cannot withdraw all the money from shares, only in funds monitored by Emerging Portfolio Fund Research such investments exceed $10 trillion. The released liquidity does not go into cash or protective assets, some of it is transferred to companies that will be least affected by the crisis. According to BofA research, investors are eager to buy shares in healthcare or pharmaceutical companies, food retailers and high-tech companies.
Social responsibility or ecology
An important change in the current crisis has been the growing popularity of responsible investment. With this approach, investment decisions are made not only on the basis of companies' financial performance, but also taking into account their impact on the environment and society, as well as the quality of corporate governance (environmental, social, governance - ESG factors). According to a study by the Morgan Stanley Institute for Sustainable Investing, 75% of investors are interested in responsible investment, while 40% are already investing consciously. At the same time, the global dynamics of involvement in ESG-investments is growing rapidly, it already accounts for more than $20 trillion worldwide. According to BofA, in the first quarter of 2020, stock exchange funds using the ESG principle received over $6 billion, while more than $40 billion was withdrawn from classic funds.
The popular opinion before the crisis that ESG principles are a luxury for "bull" markets is wrong, BofA analysts say. According to them, markets with higher ESG performance feel better now, as "responsible" companies are better managed and faster to respond to shocks. In addition, such issuers are less inclined to lower credit ratings.
Managing Director of Accent Capital Andrey Bogdanov notes that, on the one hand, ESG-compliance is a cost center for the company, but on the other hand, the attractiveness of such investments may be higher, as their cost can increase by taking into account these factors in the evaluation multipliers. "The quality of corporate governance is directly included in the total amount of risk premiums used to calculate the required return on investment: the higher the quality of governance, the lower the risk premium in this part and the higher the company's shares will be evaluated," explains Andrey Bogdanov.
Andrey Bogdanov CEO
In addition, compliance with at least regulatory environmental and labor standards reduces the risk of administrative penalties. The biggest environmental scandals of the last decade were the accident at the BP oil platform in the Gulf of Mexico in 2010 and the Volkswagen diesel scandal. Apart from direct losses, they also cost companies tens of billions of dollars in fines. "An important aspect of the popularity of such investments is the compliance of these principles with personal values. People are increasingly thinking about what the future holds for their children," says Sylvia Wegmann, Head of Sustainable Investment Solutions at Julius Baer Asset Management.
Whereas in previous years environmental factors played a major role in ESG investments, social factors have now come first. According to BofA analysts, a well-organized health care system, product safety and a stable human resources policy (regarding holidays and childcare services) will stimulate growth during the downturn. "Companies with higher employee satisfaction have been more resilient to market downturns," BofA analysts say. "Sociological surveys show that a significant part of the population is ready to buy more from the company that is now taking steps to help fight the pandemic," - said the investment strategist of "BBC Premier" Alexander Bakhtin.
The concept of responsible investment is far from new to the market and was first formulated as an organized discipline in the early 1970s in the US and UK. In 1971, the Pax World Fund was established, which invested in various assets based on the principles of corporate social responsibility. Further development of social investment led to the definition of ESG-criteria for evaluating individual companies. One of the fundamental documents that laid the foundation for responsible corporate governance was the Paris Climate Agreement.
For a long time there was no high interest in such investments. According to Konstantin Asaturov, asset manager of Sistema Capital Management, at the very dawn of responsible investment development, investors were skeptical about them, only in the last 15-20 years this direction has gained wide popularity. Many funds purposely refuse to invest in companies that do not meet ESG requirements. In particular, in 2018, the Danish pension fund PKA ($46 billion under management) sold its shares in 70 coal companies and 35 oil and gas companies as its contribution to the Paris Climate Agreement.
Russia was not involved in the development of responsible finance rules and standards, but is developing national rules based on global experience. In May this year, the Bank of Russia for the first time set requirements for issuers planning to issue green, social and infrastructure bonds, the revenues from which will be used for projects aimed at developing public life. According to the document, the decision to issue such bonds may contain a condition on the targeted use of funds from their placement, a description of the project for which the funds will be used, as well as a list of internal documents of the issuer and its procedures for the selection and evaluation of specific projects, a description of the mechanism of control over the targeted expenditure of funds.
The first green bonds appeared in Russia as early as last year, at the same time a specialized infrastructure was created. On 1 April 2019, the Moscow Exchange joined the initiative of the "Sustainable Stock Exchanges" (SSE), founded in 2009 by UN Secretary-General Ban Ki-moon. Already in August, the Exchange launched the Sustainable Stock Exchanges section. Today, five bond issues of three issuers are traded in this sector for a total amount of over 6 billion rubles. The first Russian green Eurobonds were placed by RZD in May last year, with an issue volume of €500 million. In March this year, the company placed another issue of such securities for 250 million Swiss francs.
Growth in popularity of the topic of responsible development was served by the launch of the Moscow Stock Exchange of special indices, namely, "The MosMarket Index - RSPP Responsibility and Openness" and "The MosMarket Index - RSPP Vector of Sustainable Development". Both indices use ESG factors in their calculations to estimate the weight of a particular paper and essentially filter out the most suitable assets for an investor in terms of meeting these criteria. "As for the current structure of these indices, it is worth mentioning the prevalence of companies from the energy, metallurgy and mining sectors. Of the other index participants, we will single out representatives of the telecommunications sector (AFK Sistema, MTS and Rostelecom), transport (Aeroflot) and finance (Sberbank)," says Konstantin Asaturov, asset manager of Sistema Capital Management. First Deputy Chairman of the Management Board of Sberbank Oleksandr Vedyakhin told "Money" that last year the bank focused on products for people with disabilities: a proposal was formed for customers with sight, hearing and other problems. "The second priority was eco-friendliness: we significantly transformed our processes, which allowed, for example, to reduce the number of paper documents by 30%," - said Mr. Vedyakhin.
Women's and other indexes
Under such conditions, banks and management companies actively offer products that meet the growing needs of customers. According to a Kommersant survey of the largest retail management companies and banks, many market participants understand the concept of conscious investment. "Rosbank L'Hermitage Private Banking has been developing the area of social investments for several years: in addition to creating products based on ESG principles, we are actively developing a new area of investment with elements of charity," said Rosbank Senior Vice President Dmitry Enukov.
Responsible investments are available mainly as part of trust management and represent a portfolio of shares of companies that meet the requirements of ESG. "The effectiveness of such investments largely depends on the quality of management, so it is very difficult to distinguish the contribution of ESG-approach in the investment process," - said Konstantin Asaturov. There are more widely presented on the market ready-made strategies of passive management ETF, which follow a certain index, using ESG-criteria along with other indicators. In particular, Alfa Capital offers its clients an Alfa Green Investment trust management strategy - it includes a set of foreign ETFs, some of which expose companies with high ESG ratings, while others focus on companies with a direct positive impact on the environment. At the same time, instruments of companies engaged in controversial industries are immediately excluded from the list of possible investment objects. "This is a complex value-oriented product that allows customers to approach their investments consciously, without giving up their financial goals and potential investment income," says Ekaterina Vinogradova, head of investment business development projects at Alfa Capital.
Some banks offer funds for their own indexes. For instance, in 2019 Sberbank Private Banking offered a strategy for the SPB Women Impact Europe Index. The investment index consists of shares of 30 European companies, which were selected on the basis of the bank's own metrics developed to assess the level of gender balance in companies. "Another interesting strategy - FoodTech Index - is formed of shares of companies engaged in the production of alternative protein and actively developing new technologies in the production, storage and delivery of food," - says the head of Sberbank Private Banking Evgenia Turikova.
Investments for the select few
Such investments are not available to a wide range of investors and are not yet interesting, as they are made for long periods of at least three to five years. A retail investor has a more limited investment horizon. This is indirectly confirmed by the maturity of deposits. According to the Central Bank, the dominant share of deposits is opened with the term up to one year. According to Ekaterina Vinogradova, high-net-worth clients want to see a slightly different level and format of return on their investments and include an intangible component in their decision making system. However, there are also those who really look at ESG exclusively from the point of view of risk management and increasing the potential return on their investment. "There is a minority of such people on the Russian market, if only because the segment is really still new for us, the interest to it is cautious and the level of understanding of the concept itself from a wide range of investors is not very high yet," - says Ms. Vinogradova.
According to Alexander Vedyakhin, millennials under the age of 30 prefer responsible investment. "Given that the principles of ESG have only recently been used in Russia, it's too early to talk about any reliable statistics on clients. We see a growing interest in such investments from clients of different ages and with different portfolio sizes," Dmitry Enukov believes.
In the next few years, the Russian market will be mastering ESG principles rather quickly, and Russian private banks will remain at the forefront of this direction. "Obviously, the teams of these banks should make the necessary efforts and convey the benefits of ESG principles to their clients. Against the background of low rates in all major currencies, the application of ESG principles gives banks the opportunity to build a new dialogue with clients in the formation of portfolios", - said Dmitry Enukov.
Therefore, investors should expect new strategies in the field of responsible investment. According to the survey of market participants, many banks plan to significantly expand the list of such investment solutions during the year. According to Evgenia Turkova, Sberbank Private Banking plans to issue at least two more ESG strategies by the end of the year. "This year, the system of investment consulting will include ESG-scoring, which will be used to assess the attractiveness of investment instruments on an equal footing with generally accepted financial indicators such as ROE or ROA," Ms. Tyurikova shared her plans.
Management companies will also actively promote responsible investment among Russians. Thus, on May 20, VTB Capital Investment announced the launch of Russia's first responsible investment retail unit investment funds. Clients are offered two funds "VTB - Shares Fund. Responsible investments" and "VTB - Bonds Fund. Responsible Investments". They focus on investments in securities (shares, bonds) of Russian companies that meet ESG criteria. According to Vladimir Potapov, Chief Executive Officer of VTB Capital Investments, Senior Vice President of VTB, Chairman of the Board of Directors of VTB Capital Asset Management, the funds envisage active asset management, which means that they will take into account not only changing macroeconomic processes in Russia and the world, but also the speed of integration of environmental, social and managerial factors in the production processes of Russian companies. "We see that it is important for investors that investments do not just work, but work for the benefit of society as a whole," said Vladimir Potapov.
The importance of developing such tools is not only in the interests of the new generation of investors in the Russian market, but also in encouraging their competitors to increase their transparency and invest more in environmental and social capital. "In the future, such factors will play an increasing role in selecting investment targets not only for professional managers but also for private investors. In this regard, the Russian financial market is well adopting Western development models, which, in our opinion, will be widely welcomed by the wider investment community," says Konstantin Asaturov.