ESG is integrated
Whether it is environmental protection, respect for human and labor rights or responsible corporate governance the ESG principles are of great importance for DJE. Richard Schmidt, Co-Fund Manager of the DWS Concept DJE Responsible Invest and Head of Absolute Return, explains DJE's approach in an interview.
Why does DJE invest increasingly in sustainable investment?
As an investor in sustainable companies you generally buy companies with a proactive usually above-average successful management. This is reflected in the performance of the respective investments in the DJE funds. In addition, in the coming years almost only those companies will be successful on the market that can present a credible and comprehensible concept of sustainability. And this is not only about the products themselves but also about the suppliers, the way they produce and their corporate culture. We can already see the strong customer preference for those products that can be bought with a really good conscience.
Has the Corona crisis further increased the willingness of private investors in particular to invest in sustainability?
Corona has shown us all how dependent we are on each other and how much our current behavior can influence the future. The hygiene standards at animal markets in faraway Wuhan also play a major role for our future - just like the state of the rainforest in Brazil. Sustainable action in this context means not acting at the expense of our fellow human beings or future generations.
For investors, however, it was more important in retrospect because they saw to what extent companies from less sustainable sectors such as oil, gas, automobiles and tobacco lagged behind the market in the Corona crisis. Profits have collapsed and dividends have been cut, the outlook is still bleak. On the other hand there has been a very strong outperformance in favor of tech and healthcare companies - and this supports the already strong sustainability trend. After all, these industries have a much better eco-balance than the ones mentioned above. And the more they have to internalize the ecological costs caused by the companies - be it through CO2 certificates or regulation - the more likely it is that the proactive sustainable companies will benefit. Private investors will increasingly have to ensure that they invest in funds that take account of the trend towards sustainability.
What do clients, especially institutional clients, expect?
Our clients expect an extensive, fundamental analysis of the companies in which we invest. This of course includes an ESG analysis. In order to have a particularly good level of information we do not only talk to company representatives personally about ESG issues - the so-called engagement - but also work together with the data and analysis house MSCI which provides us with harmonized data for a large number of companies. Private clients as well as institutional clients appreciate our ESG assessments of individual companies and the expertise we established in this area. The focus of many enquiries is based on Pillar E such as environment and here in particular CO2 monitoring.
How are ESG criteria taken into account regarding stock selection?
ESG is one of the six pillars of our bottom-up stock selection process. This applies to all DJE funds with an equity exposure. In particular the assessment by MSCI ESG Research contributes to the overall rating. To develop the rating for a company MSCI identifies significant opportunities and risks from an ESG perspective for each sector. In a next step these key issues are weighted according to their impact on the company and the expected time to their occurrence. A weighted average score is generated by calculating the weighted average of the key areas. In order to avoid an imbalance within a sector the average score within the sector is normalized to give the overall ESG score. The higher the score, the more positive the contribution to the bottom-up assessment.
Is reduced CO2 emissions now a key criterion for assessing sustainability?
The term sustainability is often used in a vague way. There is a lack of a fixed definition and everyone can interpret the term from his or her own point of view. This makes us as investors all the more grateful to have a few well-defined sustainability indicators at our disposal and these clearly include a company's CO2 emissions. Thanks to the large sustainability agencies this data is available across all companies and can also be monitored continuously in our DJE funds. In our DWS Concept DJE Responsible Invest, for example, we focus on a maximum CO2 level that may not be exceeded by any portfolio company. This means that the fund combines companies with a low carbon footprint and at the same time offers investors a return. The CO2 value will also play a key role in the future political regulation of sustainability funds. The upcoming definition of sustainable investments at European level - the so-called taxonomy - will make CO2 reduction a core element and thus represent the logical implementation of the Paris Climate Agreement in terms of financial markets.
Do you have examples of any exclusions or over-weightings that you have made from an ESG perspective?
Firstly, we are a signatory of the United Nations Principles for Responsible Investment (UN PRIs) and thus exclude all companies that do not comply with the UN's Principles for Sustainable Investment. In addition we also exclude companies from certain industries across DJE. These include arms manufacturers. In the DWS Concept DJE Responsible Invest, for example, we do not include cement or aluminum producers as CO2 emissions are many times higher here than in other sectors. We selectively include companies from industries of the future such as fuel cell manufacturers. We also see the associated leading producers of green hydrogen as a suitable investment. In addition to hydrogen technology we believe that selected companies from a number of industries are both green and very well positioned in terms of their business models.
Which performance drivers do you rely on?
Performance is made by the good performance of individual stocks. Here we benefit from our approach of knowing all portfolio companies inside out. Quickly identifying the right companies in the fields of chip manufacture, software development, vaccine production or fuel cell technology is our key to generate good long-term performance. Performance and sustainability go hand in hand, because in most cases the sustainable companies are also the outperformers.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.