This article aims to explore how the inclusion of Environmental, Social, and Governance (ESG) criteria became a critical part of the management of Buy & Maintain (B&M) portfolios for insurers and other long-term investors and why we consider that the addition of new climate-aware guidelines such as temperature or carbon intensity should be implemented in all B&M portfolios, when possible, subject to a sound engagement policy.
While early bird institutional investors started to incorporate ESG criteria in their portfolios some years ago, the trend intensified in 2021 with the Covid-19 crisis and the introduction of the new European Sustainable Finance Disclosure Regulation (SFDR) that encouraged investors to opt for more ESG transparency. B&M institutional investors showed a strong preference for asset managers to position their portfolios in the Article 8 category (portfolios that promote environmental and social characteristics in their investment strategy), rather than the more mainstream Article 6 definition.
In the case of B&M portfolios, it is key to define the most efficient way to integrate Article 8 SFDR portfolio requirements while also complying with the inherent features of this type of process, such as stability and low turnover. The SDFR classification must be declared by the asset manager and could lead to a modification of the investment objectives, IMA and the guidelines of the fund.
Today, we consider ESG inclusion in a portfolio as the new baseline for institutional investors. This is only a first step in a process towards more comprehensive commitment to climate investment. World leaders renewed their ambition for a real pathway to tackle climate change at the COP26 in Glasgow. This gives investors the incentive to advance a step further towards portfolios that have sustainable investment and impact objectives (SFDR Article 9) or, as is increasingly likely, Net-Zero strategies. Thanks to their relevance to long-term investments we consider that the inclusion of such climate criteria should be implemented in most, if not all, B&M portfolios. Long-term investors have a key role to play in financing the energy transition and have the power to influence companies to move towards to a more sustainable business model.
The paper concludes with a range of business cases that detail how an ESG portfolio. (Art 8 type) can be transformed into a sustainable portfolio (Net-Zero objective or Art 9 type). Amundi's B&M team can guide clients into adding more ESG, sustainable, climate and net-zero objectives to their investments.