Middle East Investor Roundtable 2020: Dimensions of diversification

Funds Global Mena – A sharp reduction in oil prices to an 18-year low in April 2020, combined with greater emphasis on healthcare, has seen ESG funds benefit. How have ESG funds weathered the Covid-19 pandemic and are you systematically building this into your investments? Talhaoui – Firstly, I’d like to echo the extremely good behaviour that was witnessed around ESG related to investment vehicles. If you look at objective data in Q1, Morningstar data, 51 out of 57 indices that were ESG outperformed the equivalent traditional indices. That also reflected in terms of flows. The first quarter is important because it was very volatile, and you saw more than US$40 billion going into ETFs and mutual funds that have an ESG angle. For us, it’s very clear – ESG is the way to go, and if you go to northern Europe and speak to certain clients, ESG integration is not even a subject for conversation, it is happening – and fast. We have many conversations in the region at different levels and the region is embracing ESG at different levels. If you think about the usual suspects, the large institutions in the region, they want to adopt ESG investment principles just because they want to adopt the best principles of today. They are embracing initiatives, whether it’s two-degree alignment or other global policies, the Middle East is publicly engaged in these topics. At a more granular level, if you look at Saudi Aramco and what they have done in terms of being more public and attracting investors from all around the world, they are very vocal about the fact that they are embracing ESG, that they want to be seen as a company that is adapting and evolving how investors want to see. I am positively surprised by the engagement in the region. It’s not something that is feared, it’s a phenomenon that is embraced at every level. Coming back to the roots of ESG, it is three letters and each one is important in terms of the risk it represents. Don’t forget that Islamic finance and Sharia principles to some extent can be seen in relation to what many ESG investors want to obtain, which is ethical investments, more transparency and governance. That’s why this is absolutely not an alien concept in the region. Dickinson – Fifteen years ago I couldn’t find anyone to embrace the idea or even talk about it and now it’s mainstream. There is a basic notion that if you are interested in investment performance, ESG is very interesting because transparent and well-managed and well-governed companies tend to outperform over time, and that has now been proven. From something that was seen as rather esoteric and worthy, it also makes economic sense. My own organisation, which is very deeply embedded both in the Middle East and particularly in sub-Saharan Africa, we see it as reflected in our own corporate behaviours. It’s absolutely fundamental and sits at the core of the firm that we have a wider responsibility within our communities, where we play a very major part in terms of economic activity, to be seen acting in an open and fair way. We have found there are direct benefits as a banking organisation for shareholders and investors in adopting this approach on a wholesale basis. Grist – It is obvious to everybody now, if it wasn’t before, that when you are making an investment, a well-governed company that takes ESG considerations seriously is a sounder investment to be making. We have had ESG considerations as part of the portfolio analysis of all our portfolio managers, regardless of whether they are under the ESG label or not, since 2010. This is across all of the key ESG areas, whether that’s climate change, social issues or biodiversity – we are and have been putting it at the heart of our investment decisions. We approach ESG in three key areas: ESG integration into our investment process, active ownership of the securities that we hold, and leadership, policy and advocacy. ESG now has a primacy to it following Covid-19, so in terms of portfolio management, having that ESG component either as a very direct investment within your portfolio, or having it as integrated into all of your investment decisions, is clearly very important. Stull – From my perspective, the ‘G’ is what I see the most in terms of what is the governance? Do the investors have oversight into what’s going on? Is there a limited partner advisory committee (LPAC)? What role does the LPAC have? What’s going on down the chain at the portfolio companies? Then there’s the ‘S’ as well. That has seen a big rise between #MeToo, diversity and other issues, and people are digging in a little bit at the manager level and at the portfolio company level to see that these companies and managers are doing things the right way and there aren’t going to be surprises later on. We are seeing a number of the sovereigns and some of the larger institutional investors develop ESG policies that they are now rigidly pushing on to anyone that wants to do business with them, and that’s having an impact on these managers and what they’re offering and putting in place. Mallah – Part of the ESG integration into how investors do things here is a result of what tools they have and how available these solutions are. Compared to 15 years ago, managers are institutionalising ESG and making these easily accessible products, but consultants here also have available templates to evaluate these. These are tools that investors have now, and they have become a lot more aware, but also a lot more able to measure and filter according to those. Historically, the ‘S’ aspect particularly is very much in tune with a lot of the culture here. You see how businesses manage their own internal affairs and they are quite aware of those principles. The environmental aspect is the one that is not always in sync because of the source of income and wealth in this part of the world, and this is where there is a much more nuanced approach to it. You could be an oil company but still have an environmentally responsible way of doings things and offsetting that might make it a lot better rated. Duke – Some of the societal impacts have come more to the fore during this pandemic, not just diversity and inclusion. For example, how are companies looking at furloughed workers, what is their approach to staff and are they are genuinely a caring organisation? Those sorts of things are being talked about more, but I’m not sure how much of an investment decision is based upon how companies treat their staff. Capitalism is changing, but people are investing because they want to grow their money. I think it’s too early to say that ESG has become a core part of the investment process for clients in the Middle East, but interest and awareness are increasing.


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