Etica Funds was recently guest of a call dedicated to institutional investors organized by SharingAlpha. During the call it was possible to present insights into alpha generation from several leading managers.
The Etica speech was given by Arianna Magni, Head of the Institutional and International Business Development Department at Etica Sgr.
Etica Funds, that this year turns 20, is currently the only Italian asset management company that has been focused on socially responsible investments since it was founded and it is also the first Italian asset manager to sign the UN PRI in 2009.
“We have been working with passion for SRI investments pioneering sustainable finance in Italy and demonstrating that ESG analysis brings added value, even in terms of risk-return profile” declared Arianna Magni.
Here we propose an extract of the questions asked by SharingAlpha and Arianna’s answers.
What is sustainable and responsible investment (SRI) for Etica Funds?
It’s a medium-long term investment strategy with the aim to create value for investors and society at large.
Our approach, in assessing companies and countries, combines financial analysis with environmental, social and good governance (ESG) factors. Etica do this according to a specific proprietary methodology of securities screening and to a proprietary metric to measure ex ante the risk resulting from factors caused by ESG issues (named ESG Risk)
Today sustainability and responsibility are keywords in the financial sector. When Etica was established in 2000, it was a niche market. Someone said that ESG investing was just a fad. We can now say that ESG is absolutely here to stay! Indeed, today it can be described as mainstream exceeding $30 trillion of assets under management worldwide, with 34% growth in only two years and Europe at the top of the rankings.
Why is it crucial now to consider ESG issues in investments?
To perform a more comprehensive control of risks: risks coming from ESG factors are currently more and more relevant and are difficult to be intercepted with the traditional financial analysis. Those risks have a concrete financial impact in the long term, affecting stock market returns and price volatility.
According to the World Economic Forum, indeed, in the last 10 years global risks have shifted from being mainly economic in nature to mainly environmental and social. these risks become more frequent and also more significant given the extent of the economic and financial damage they can cause.
But E (environment) is not the only topic. The sanitary emergency due to pandemic this year highlighted other topics that regard S (social) and G (governance) factors, that actually cannot be excluded anymore in evaluating companies, regardless of Covid-19: for example, Health and safety management in the workplace, human rights, labour rights, fiscal issues, welfare of shareholders
Our ESG evaluation process has always been based on all these 3 ESG pillars, each one taken into great consideration like the others. And now it is globally clear that responsible investments must consider also S and G, and not only environment.
Which are Etica’s special features?
Etica’s special features are basically two.
First, our specific proprietary methodology of securities screening, named ESG EticApproach: our funds invest in securities selected through a careful socio-environmental analysis, in order to scout the best performing companies and countries (for gov. bond emissions) that are sustainable from a financial and also from an ESG point of view. And we do this for all our funds: our assets under management are 100% SRI.
Second, our proprietary metric for ESG Risk: we perform, for all funds of our, a double check in terms of risk control: we combine financial risk and ESG Risk. Is the one resulting from ESG issues, so from Environmental, social and governance issues. Well, our Risk Management studied it and designed a proprietary metric, named “ESG Risk” to measure it ex ante, before investing. They discovered that the ESG contribution to the total risk of a portfolio may vary from 5% to 20%. Therefore, it is something to be taken into great account in investment choices: this “doubled” risk control helps to improve the risk-return profile of a portfolio. In particular the ESG metric improves estimate the financial volatility, especially over the long term.
Our product range is divided into 6 Italian mutual funds, one of which related to climate change, and 3 Luxembourg sub-funds (launched at the end of 2019 and mirroring some of our historical strategies), distributed across all risk/return profiles. They are all plain vanilla.
We cover 3 asset class: global equity, multi asset and global fixed income with strategies with a solid track record. Our global equity funds (Etica Sustainable Global Equity and Etica Azionario) are those that best show the added value of the ESG analysis of companies.
Finally, what are the opportunities in the current environment?
According to us, opportunities are in the best performing companies and countries that are sustainable from a financial and also from an ESG point of view, and in SRI investments of course.
Our portfolio managers, in selecting companies in which to invest, adopt a thematical approach, looking for investment opportunities and for positive impact on society at large. Big changes are happening especially nowadays, during the current recover phase from covid-19 economic crisis. Thanks to the European Green Deal Investment Plan, Europe aims to become the first climate-neutral continent. The aim is to find those companies that could benefit from those changes and that are most exposed to these themes, for example companies that might benefit from their investments to reduce emissions.
Our portfolio managers consider specific SRI Macro Trends for analysis and investments: health care, smart cities, process automation, climate change, internet of things, sustainable mobility, demographics, healthy living, food security, cyber security, 5G technology.
In accordance with the investment themes identified in the top-down approach, during the bottom-up analysis particular focus is placed on trends linked to ESG criteria.
In general, in our opinion covid-19 should push towards an even more sustainable approach to finance, as what we need know is more investments in renewables, in sustainable mobility, energy efficiency, impact investing initiatives for public health and social infrastructures, and digital innovation.
We believe and demonstrate that sustainable, responsible investment allow to create value over the long term, both financial value with returns adjusted for risk, and non-financial value, value for the community and the environment.
29 September 2020Responsible finance ESG investments ESG risk Ethical Finance