ESG Approach
Learning To Invest Responsibly
Environmental, Social and Governance (ESG) investing means different things to different people. As investors look to diversify their portfolios with responsible and sustainable investments, they require more than one-size-fits-all strategies to meet their evolving needs, and shouldn’t be faced with compromised returns. While there is no “right way” to approach ESG investing, we actively manage for ESG opportunities and risks, positioning our clients for success in the long term.
Better Outcomes For All Stakeholders
At Trafield, we believe that doing the right thing for our clients, our people and our communities leads to better results for all stakeholders. We approach responsible investing in a manner that is consistent with Trafield long-term commitment to sustainability. And, as active investors, we strive to embed ESG best practices throughout our investment, risk and talent management processes, while delivering investment performance and staying true to our role as a fiduciary and risk manager.
A Sustainable Foundation
Trafield’s strong foundation was built on delivering financial returns and making a positive impact on the world, and began over 10 years ago. Trafield is committed to solving the financial challenges of our changing world and is a recognized leader in purpose-driven business, investing and ESG practices.
We bring deep investment expertise across asset classes and provide our clients with investment solutions to their ESG and sustainability challenges.
Valuating ESG Investments And Supporting Client Interests
Fundamental Research is the cornerstone of our process. Research conducted by our investment professionals across the range of equity and fixed income strategies we manage is the source of investment professionals conduct deep fundamental research to identify compelling investment opportunities. They seek to determine company, industry, and sector fundamentals and prospects over short and longer terms, projecting how industries and businesses will change over time. When conducting the fundamental research necessary to build financial estimates for individual companies, we consider the potential risks and opportunities of various factors, including ESG factors, assessing their materiality in affecting a company’s financial prospects or business model.
Engagement: During the course of a typical year, our investment professionals engage with thousands of company managements on a variety of topics, including ESG issues. As active investors, we seek to build constructive long-term relationships with companies’ management teams and their boards.
ESG Investments For Every Risk And Return Budget
Trafield Quantitative Solutions’ approach to integrating ESG in our investment portfolios is intended to address the challenges facing the responsible investor, without compromising long-term risk mitigation or expected returns. As a diversified multi-factor equity manager, we employ various tools that enable us to seek alternatives for investments where ESG exposure may be problematic.
Aligned with a client-first approach to investing, we developed a comprehensive ESG framework that evaluates, expands and integrates ESG insights to solve a variety of problems facing responsible investor with different risk budgets, sustainability objectives and interests. Our ESG framework can be applied to investment strategies across the active risk-return spectrum.
Our commitment to delivering better ESG outcomes to our clients is highlighted through our participation in the Council of Institutional Investors (CII), International Corporate Governance Network (ICGN), Sustainability Accounting Standards Board (SASB), and Investor Advisory Group (IAG). We also adhere to the Task Force on Climate-Related Financial Disclosures and Japan’s Stewardship Code. As a responsible investor, Trafield Quantitative Solutions advocates for accountability across the investment community. Our approach to ESG investing is continually evolving, as we embrace new data, insights and techniques.
Identifying Sustainable, Long-Term Competitive Advantages
At Trafield Fixed Income, we recognize the importance of integrating ESG factors into our global investment research assessment and decision-making process. We consider relevant ESG factors in our investment process to work toward our ultimate fiduciary duty—searching for the highest risk-adjusted returns for our clients.
We are committed to a substantive and fully integrated approach to ESG investing. Trafield Fixed Income is aligned with the world’s leading proponents of responsible and sustainable investing, and implements the Principles of the UN Global Compact (UNGC) and the UN Sustainable Development Goals (SDGs) to help our clients achieve ESG objectives that may have a lasting impact on our global society. We also established the trafield Fixed Income ESG Committee to act as the governing body for directing and overseeing all of our ESG-related activities, including:
- Appointing a Head of ESG Research, reporting to the Head of Credit and supported by a new team of investment specialists
- Developing a new framework where Fundamental Analysts assign internal ESG ratings and a new methodology that incorporates one ESG rating scale for all issuers
- Expanding policies and procedures that integrate ESG factors into the Trafield Fixed Income investment process
- Instituting and maintaining guidelines for ESG-related funds managed by Trafield Fixed Income
Socially Responsible Investing: Renewable Energy, Education And Transportation Infrastructure
For over 10 years, Trafield Private Capital’s investment approach has been defined by thoughtful analysis, long-term thinking and strong relationship. We believe that integrating ESG factors into our investment process is a fundamental part of generating attractive risk- adjusted returns for our clients.
As a long-term investor, our expected holding period for most investments is 10 years or more, and we have had the good fortune of maintaining continuous investment relationship with many businesses and institutions extending over a decade. This has required an investment approach oriented around sustainable practices. Our long and pioneering history investing in the renewable energy, education, and transportation infrastructure sectors(among others) has been underpinned by thoughtful consideration of ESG factors. As of year-end 2019, our AUM included over $6 billion invested across socially responsible sectors.
Regular engagement with companies in our investment portfolios has always been a critical part of our investment process. As a relationship-based investor, we strive to cultivate active dialogue with the companies and institutions in which we invest and meet face-to-face with most companies several times each year. We engage with companies regarding their ESG practices because we believe it is in those companies’ long-term interests to be responsible corporate citizens
Building Better Outcomes
At Trafield Real Estate, we strive to embed ESG best practices throughout our real estate investment, asset management, risk management and talent management processes. We embrace corporate responsibility, fairness and transparency as we work to meet the needs of our global clients, and bring the E, S and G of responsible investing to life.
- Environmental: Our responsible resource reduction strategies enhance environmental and investment performance for our clients. Focusing on waste prevention and preserving natural resources, we advocate for operating practices and construction methods that: 1. protect human health and preserve biodiversity; 2. increase the use of sustainable materials and renewable energy; and 3. reduce waste and CO₂ emissions.
- Social: In addition to corporate grants and charitable contributions, we empower our employees to volunteer their time and skills to initiatives that align with their interests, and increase human potential, self-sufficiency, and diversity and inclusion. With a commitment to our communities and a long-term approach to ESG investing, we’ve invested over $800 million of equity across 92 properties with impact components since 2015.
- Governance: ESG issues are foundational to our investment analysis and due diligence processes, which include a rigorous underwriting regimen, risk management evaluation and approval procedures. Our ESG Policy guides our ESG-related objectives, and we report ESG fund performance to our investors on an annual basis.
THE JOURNEY TO NET ZERO
FROM GREENFLATION TO GREENIUM
$35
TRILLION
More than a third of all global investments in the world’s top five markets are now sustainable
As a leading global active manager, we recognize the importance of integrating ESG best practices into our global investment processes. We take a holistic approach to ESG investing and are committed to helping our global clients meet their business and environmental objectives.
The detailed application of ESG principles sits within each of our autonomous businesses. With a deep expertise across public and private markets, we help our clients understand how ESG investments can serve as a driver for desirable outcomes and returns. By tapping into the capabilities of our global affiliates, we customize investment solutions that meet the unique ESG needs of our clients.
Emphasizing a customizable, client-driven approach, paired with a long-term perspective, Trafield employs a robust and transparent ESG investing process. We strive to deliver sustainable business and environmental solutions, and continue to broaden our ESG product offerings, creating better outcomes for our clients in the long term.
CONFUSION AROUND THE MEANING OF ESG
10%
PERCENTAGE OF WORLDWIDE ASSETS IN ESG FUNDS GLOBALLY
$8.8 TN
AMOUNT POURED INTO ESG FUNDS IN 2021/2022
Distinguishing Green Fact from Green Fiction
Yet the problem of greenwashing is partly the result of ambiguity and varying definitions. That’s fertile ground for misunderstanding and, in some cases, even misrepresentation. It can be hard to distinguish between fact and fiction.
There remain many debates in the world of ESG investing that have led to the current confusion. One is about fiduciary duties: Do investors have the legal right to allocate and steward capital to tackle societal challenges such as climate change?
Financial return is the primary goal of most investors and where an ESG risk poses a threat to financial return, many jurisdictions around the world not only allow but increasingly require investors to consider those risks and act accordingly.
Whether investors can legally pursue over-arching sustainability goals – such as the broad international objectives within the Paris Agreement and the UN Sustainable Development Goals – is still moot in many jurisdictions, but a cultural shift towards thinking about fiduciary duties in a broader systemic context is under way and asset owners are increasingly stating that earning a financial return is not their only investment goal. For example, the UK’s Church Commissioners, which manages the Church of England’s endowment, states that it has a duty to invest in a way that benefits the wider world.
The Double Materiality Concept
Increasingly, asset owners and asset managers are looking beyond the impacts of ESG risks on their portfolios to understand how companies impact the economic, social, and environmental systems around them – a concept known as double materiality.
The How of Sustainability
Pragmatists accept that mothballing fossil-fuel energy systems and switching on renewables is not going to happen overnight.
The second major debate – one that is currently raging in Europe – is about the “how.”
Natural gas or blue hydrogen can play a vital role in facilitating the transition to a decarbonized world, and thus allocating capital to these so-called brown assets is an important element of meeting the Paris goal of limiting global warming to 1.5ºC above industrial levels.
Greater than 99% consensus on human caused climate change in the peer-reviewed scientific literature – IOPscience
While ESG investing has been vaunted as key to decarbonization of the global economy, it’s not a clear or straightforward path.
The important thing in ESG investing is that asset managers are clear with clients about what can and can’t be done. All investment strategies make trade-offs and ESG strategies may trade off risk-adjusted returns against sustainability outcomes. It is vital – for clients as well as the wider industry – that everyone understands what these trade-offs may be and their possible costs so that clients are able to choose the right strategies to meet their expectations.
COMMITMENT VS. ACTION
$130 TN
FINANCIAL ASSETS COMMITTED TO NET ZERO EMISSIONS BY 2050
70%
FUNDS MARKETED AS ESG THAT FALL SHORT OF TARGETS
Commitments vs Impact
These findings highlight that ESG commitments do not necessarily equal real-world impact. Likewise, a lack of public commitment should not be equated with having no interest in ESG.
As the ESG world becomes more contested and political, public commitments may not tell the whole story. Investors should look beyond the pledges and determine what asset managers are doing in practice – what strategies, resources, and organizational structures they have in place to allow their clients to approach ESG with integrity.
Confusion Around The Meaning Of Climate Transition
Eliminating fossil fuels from portfolios does not necessarily create a fossil-fuel-free world.
In fact, it may well delay and obfuscate its orderly transition. Being transparent and unambiguous about the objectives behind various green funds, investors can choose what strategies work for them.
The varying perspectives on what constitutes green investing has created an element of confusion for asset managers and asset owners alike. The strictest definition – one the “purists” of the ESG world would apply – might call on funds to prohibit any investments in fossil fuels and finance only alternative energy projects such as wind and solar farms, which is narrower than the GFANZ pledge. But there is a growing acceptance of a more pragmatic approach to decarbonization which supports a pathway to transition. ESG funds and tools have been built around this view, which include brown assets on a credible pathway or assets that facilitate a just transition to decarbonization. These investments might include cleaner fossil fuels such as natural gas, and mining that has ties to the battery supply chain.
Minimizing carbon emissions allows for funds to manage risk, while benefits to the environment are created over time as the years-long transition to alternative energy moves forward. This approach also acknowledges the reality of today’s energy markets, with the majority of the world’s consumption dependent on oil, natural gas, and coal. Dropping fossil fuel investments may encourage the privatization of energy assets, rather than a transition to green energy. And it does little to influence the world’s largest suppliers of oil: state-run energy giants. Even if the supply of fossil fuels is curtailed, prices would likely rise in the face of global energy demand.