Our journey on the path of Sustainable Investing
We began our journey towards Sustainable Investing by restricting investments in tobacco and armaments decades ago, reflecting the values of the United Nations. OIM became a signatory to the PRI (Principles for Responsible Investment) in 2006. This was followed by investing in the first Green bonds in 2008 issued by the World Bank, and being the catalyst investor in Low Carbon Exchange Traded Funds in 2014. In recent years, OIM has been transitioning from a program of ESG related activities to embarking on a process of integrating ESG considerations across all asset classes. OIM believes that portfolios which integrate material ESG metrics into their investment decision-making process, supported by active engagement, have the potential to provide returns that are superior to those of conventional portfolios while exhibiting lower risk over the long term. This view is supported by several published academic studies and our own research. We see evidence that ESG considerations are beginning to enter the mainstream investment world. Rating agencies are implementing ESG factors that could impact the credit rating of corporate issuers. Fitch stated recently that ESG Relevance Scores reveal that ESG factors influence 22% of its current non-financial corporate issuers. ISS reports an increasing number of ESG related items on the proxy voting agendas of corporates.
The objective of our Sustainable Investing approach is to integrate ESG considerations in our investment decision-making process across all asset classes
OIM began introducing ESG metrics into the existing investment process, by giving portfolio managers a broader set of tools to consider in their investment decisions. For internal actively managed public equity portfolios, we are piloting a four-stage process, tailored around PRI’s recommendations. In 2018, OIM implemented a new custom global equity index which can serve as a benchmark for other global equity investors. This index takes into account investment restrictions on companies which exceed a defined threshold of revenue generated from Tobacco or Weapons. Within Fixed Income, we have been increasing our portfolio of Green bonds in line with net outstanding issuance in this market segment. For private markets, OIM integrates a comprehensive analysis of ESG issues into the due diligence process.
- ESG Index and Universe Screening: Reputational risk management and controversies screening individual companies radar
- Portfolio Analytics: Carbon foot printing, customized controversies screening, dead asset analysis and Sustainable Development Goals (SDG) impact analysis
- Robust ESG Metrics Database: Sourcing and consolidating material ESG data points to enhance fundamental and valuation analysis, both ex-post and ex-ante
- Company Analysis: Qualitative and quantitative peer analysis on company and prospective holdings integrated into investment rationale and company risk due diligence
- Corporate Engagement: ESG material summary conclusions validating quantitative and qualitative empirical conclusions from corporate one-on-one engagements reconciled to proxy voting action and corporate strategy. OIM has entered into strategic partnerships with two well-known global engagement providers.
Technology and the availability of alternative data sets enables greater integration of ESG considerations in investment decisions
Integration of ESG considerations requires new tools and alternative datasets that are not conventionally used for supporting investment decision-making. OIM, leveraging its partnerships with key data providers, has constructed an internal proprietary ESG database, which helps to distill material ESG data by separating the noise from the signal and provide the investment teams with more robust screening capabilities. Using the signals obtained from various alternative datasets such as RepRisk, MSCI ESG, etc , the Portfolio Managers get a better sense of the tail-risk of their portfolio holdings and potential opportunities in the market.
We believe that combining both financial and alternative metrics would increase the odds of improving the risk-return profile of our portfolio over the long run, compared to the conventional investment approach.
Our Sustainable Investing approach is beginning to incorporate forward looking methodologies in evaluating the impact of climate change on our investment portfolio
Investors need new tools that integrate energy economics, alternative climate scenarios, and traditional financial data to evaluate return and risk exposures related to climate change and new sources of energy. These tools could help investors evaluate the climate change transition risk as well as achieve greater climate sustainability in their investment portfolios. OIM recently signed a strategic partnership with a leading provider of predictive climate analytics. Our efforts to signal our commitment to a low carbon strategy through passive investment in low carbon Exchange Traded Funds in 2014 was just the first step in addressing the impact of climate change. With this partnership, we are now planning to move to an active strategy by using a highly sophisticated climate and energy simulation model to assess companies’ ability to adapt to various carbon emission scenarios. We have already integrated the “E” score provided by an external predictive climate analytics provider as an input factor in our proprietary ESG investment-decision supporting tool. This "E" score helps to quantify the portfolio's climate transition risk.
UN Sustainable Development Goals (SDG's)
OIM is conducting research with leading ESG academics on developing quantifiable SDG scores by utilizing artificial intelligence (AI) to leverage big data and systematically measure companies’ impact on the SDGs. This research will aim to provide empirical evidence hopefully addressing the widespread perception that there is a trade-off between financial returns and incorporating ESG or SDG considerations in investment decisions. It will strengthen our understanding of the interdependencies between a firm’s long-term economic value and its societal impact. OIM has compiled a detailed white paper on this topic and will publish it shortly. This paper will serve as a catalyst for a broader discussion among long-term institutional investors.
Engagement through encouragement
The last pillar of our Sustainable Investing approach is engagement. An active sustainable voting policy combined with engagement can result in more effective and durable change consistent with the UN’s values. OIM believes in a collaborative and constructive dialogue with company management to achieve mutually beneficial outcomes. The Fund is a signatory of the Climate Action 100+ initiative, has a strategic partnership with a leading engagment provider, and plans to strengthen its engagement efforts further.