This is the second part of our interview series with Milena Czaczkowska, Consultant at Alpha FMC, to discuss the impact of the environmental, social and governance principles and their impact on the financial performance of companies. She is one of the initiators of the ESG proposal developed within Alpha FMC, the leading wealth and asset management consultancy.

According to the expert, who studied at Northeastern University in Boston, before providing advisory services to the financial industry in New York City, "in the past, we have seen mixed academic evidence between investment returns and ESG capabilities due to inconsistences in data across companies and sectors, due to a lack of a universally accepted framework for ESG reporting, and because investment markets have been slow to incorporate ESG data into their valuation methodologies".

Czaczkowska references the 2015 CFA Institute Study which found then that only 1 in 10 global investment professionals were formally trained on considering ESG data in their analysis. "These days, more facts and studies are supporting the power of ESG on the companies' performance. For instance, we have the FTSE Russell survey from 2018 which stated that over half of global asset owners are now implementing ways to consider ESG. A Harvard Business School study dating from 2016 found a positive relationship between high performance on ESG issues and superior financial performance," she highlights.

Moreover, a 2017 study by Nordea Equity Research reported that from 2012 to 2015, companies with the highest ESG ratings outperformed the lowest-rated firms by as much as 40%. Finally, just recently, Bank of America Merrill Lynch, found in 2018 that companies with a better ESG record than their peers were more likely to become high-quality stocks, less likely to have large price declines and less likely to go bankrupt.

"If you look at it from a logical perspective, it makes perfect sense: integrating ESG in a company actually means you take a long-termism approach to your business operations and investments. You become more aware of your exposure to external environment risks versus focusing primarily on stock market movements. Companies that incorporate ESG principles are more protected from the financial crisis, but also from environmental risks. They are looking at a long-time horizon, at the triple bottom line, and not just at the standards anymore," highlights Czaczkowska.


A cultural change powered by legislation at the European level

"Previously, some investment companies had designated sustainability teams working on ESG topics, and others simply had working groups led by a few individuals. But ESG is not a niche topic anymore and having a group of experts working on it is insufficient. The entire company needs to be involved in this mindset and cultural shift. Business has evolved and is driven by additional factors than we considered in the past and now ESG knowledge absolutely has to be spread," states Czaczkowska.

Regulation has been a strong driver in realizing the necessity to integrate ESG in business models and practices, especially in the EU. According to the Consultant, the EU Action Plan outlined four key elements to promote transparency and hold companies responsible for the decisions they make. It involved:

1. disclosing sustainability risks;

2. defining sustainable economic activities;

3. establishing benchmarks to assess low-carbon and positive carbon impact, and

4. transforming existing legislation such as MiFID II and the Insurance Distribution Directive to include ESG preferences of the client in the suitability assessment process.


"Since then we have seen the taxonomy begin to address these key points by defining economic activities to be considered environmentally sustainable and establishing a sector framework to enable a coherent transition of the overall system," she adds.

When it comes to non-financial reporting, Czaczkowska sees the introduction of the double materiality concept, which consists of looking at the impact of business operations on the climate and the climate’s impact on your business, as a step in the right direction; "this forces companies to consider their risk exposure. We must not only consider the physical risks arising from catastrophic events (acute risk) or from long-term climate changes (chronic risks) but also the transition risks of moving to a low-carbon and climate-resilient economy".

Companies must take into account their reputational risk which is becoming ever closely linked to their successful ESG integration and directly impact their social license to operation. "Firms have to ask themselves the question – how are our current practices going to be accepted by our stakeholder, employees, and general public?" adds Czaczkowska.

She continues, "an increase in reporting disclosures can be a good thing to the extent that it promotes transparency and holds companies responsible for their decisions. However, regulation should not inhibit innovation and growth." For instance, in a recent CFA study from October 2018, 61% of respondents stated they thought that the investment analysis should be left to investment management without a regulatory framework.

Finally, Czaczkowska underlines the vision and flexibility of the country of Luxembourg, which, according to her, could position itself as a market leader in ESG. "Since the topic’s reach remains so broad and can be tackled at several levels, it would be interesting to have companies located in Luxembourg validate their approach and share their best practices around the topic of ESG."


Interview by Alexandre Keilmann

Publié le 12 novembre 2019