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The Evolution of Institutional ESG

In Conversation with Pierre Yves Goemans.


Moving first from the University of Chicago where he secured his MBA in finance, to the trading desks of J.P. Morgan, Pierre Yves Goemans then held positions at McKinsey and with two asset management firms before becoming managing director of Euroclear, one of the largest clearing houses.


His last position at Euroclear was Global Head of Strategy, where he participated in a number of decisions around investments in smaller companies, one of which would be Impact Cubed.


Upon retirement, he retained several board positions in key strategic investments from Euroclear, including his position as chairperson of Impact Cubed.


We sat down with Goemans to understand his views on:


  • The evolution of the investing landscape;

  • How it has grown to incorporate ESG;

  • Why ESG became important to global financial institutions like Euroclear;

  • And what he sees on the horizon for sustainable investing.

 

Over a 35 plus year career in finance, what are the key changes you’ve witnessed the industry undergo?


30 years ago, or maybe as few as 20, nobody was talking about ESG. In fact, the premise would have been considered something for naïve people not pursuing the long-term financial goals required by the business.


Over time, a lot of influencing factors have contributed to the change in perception and the realisation that non-financial elements like ESG may have a -sometimes indirect- impact on the financial results of companies. One of these key drivers in my opinion is the influence of younger generations. They feel a stronger need to make sense of what they’re doing, to contextualise their financial activity. ESG is definitely an important factor to fill that need.


Examples in the industry show that companies with open and “real” ESG strategies are better placed to recruit and retain the best people. This stance, in the current war for talent, has proven to be an important contributor to financial performance.  In my past experience at Euroclear, I definitely saw a motivation in people to look further than just the settlement of securities, and to offer more to clients to allow them to buy the right securities.

 

Do ESG ratings answer this need, in your opinion?


I don’t think they’re enough. Ratings offer us averages across all ESG factors and, hence, give a pure black or white judgement across the board on a company. The reality is that 100% black or 100% white does not exist. No company is perfectly good or perfectly bad on all factors.


What the investors need is a way to look through the 50 shades of grey and choose the specific factual grey that fits their ESG policy.

 

What about if we look beyond younger end-user investors?


Well, with ratings you simply cannot integrate impact into your investment techniques. It doesn’t fit. If you’re a value manager, you look for value; if you’re a growth manager then you look for growth. If you’re an impact manager then you want to look for impact, measurable impact, and not how much of a portfolio is rated ‘A’ or ‘B’ or whatever. Ratings are meaningless in this context. ESG is moving on from that way of thinking.

 

Where do you think ESG is moving towards then?


Historically, the approach towards ESG, especially in the realm of private banking, was somewhat simplistic. It involved removing a few bad securities in some sectors like tobacco, or adding some thematic investments (like manufacturing of wind turbines) to the portfolios. Asset managers also started doing systematic voting in AGMs and calling it “Responsible Investing”. This method, however, was not comprehensive enough and does not reflect the current state of ESG integration.


What we're witnessing now is a shift towards institutionalising ESG within our financial system. This transition is not just about adopting a new set of practices; it's about embedding ESG principles into the very core of our investment strategies. The largest pension funds are already quite good at this level of sophistication because of their size, their very long-term horizon, and their fiduciary duty. But we’re now seeing more of this sophistication trickle down to even the smallest of asset managers.


This is why relying on ESG ratings alone falls short of capturing the true impact of our investments.


As investors, our goal should not be to categorise our portfolios based on arbitrary grades but to seek out measurable, tangible impacts.

Whether you're a value manager, a growth manager, or an impact manager, the focus must be on the outcomes of your investment decisions. This shift away from a ratings-centric view towards a more impact-oriented perspective is central to our ongoing efforts to institutionalise ESG.


The proliferation of ETFs and mutual funds focused on ESG is a testament to this change. We're no longer talking about a niche area of interest but a fundamental shift in how we approach investing. The institutionalisation of ESG is a clear indicator of our progress towards integrating these principles into our financial ecosystem in a meaningful and impactful way.

 

How did Euroclear come to the ESG space?


I think there was the fundamental question quite early on of what Euroclear’s role in the ESG infrastructure should be. Euroclear are of course obliged to process all securities in much the same way as other financial infrastructures like the New York Stock Exchange have to make all securities available. However, the idea was that Euroclear also had a role to play as an infrastructure to provide the necessary information to the markets that would help them understand the (ESG) impact of their investment decisions.

 

And how did that lead Euroclear to becoming a strategic partner to Impact Cubed? 


Impact Cubed quickly emerged as the standout solution in terms of their coverage and quality of data. But more importantly for me, is the ability and the capability that Impact Cubed offers investors the capability to integrate ESG as a pivotal factor within their decision-making and portfolio construction. Impact Cubed provides managers with insights and equips them with the necessary tools to optimise risk, return and impact at the same time, the so-called 3D investing— essentially, the fundamental components required to make any informed investment decision. This is where they really excel.

 

What do you see next for the ESG landscape?


Currently, ESG is still a risk-mitigation game. Investors do as much ESG as they can as long as it doesn’t jeopardise returns. But there will be a point, somewhere in the future, where ESG decisions will no longer be taken solely based on a “risk/tracking error limitation” approach but also to actively seek more financial performance from the non-financial ESG factors. It is very probable that the link between “bad ESG behaviours” and company performance will become clearer and will enter into the investment decisions. We most probably will soon start shaping stories around, for example, the financial risk of investing in securities with extremely high carbon emissions, because of the risk they may be asked to pay for the environmental impact of their business operations. Or perhaps the stories will be around the rising cost of insurance premiums as they price in the risk of natural disasters. Or around the strong current correlation between stronger diversity and better financial performance.

This will require a better and fact-based understanding of the underlying ESG factors of each issuer, as analysts today do for the financial data.  That's where we’re headed for sure.

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