Treasury Practice

Building a sustainable investment strategy

Published: Nov 2021

Enno Dykmann, Treasurer of Alliander, and Geeta Sharma, Director, Portfolio Manager at BlackRock’s International Cash Business, discuss how treasurers can invest cash in a sustainable way, and how asset managers are incorporating ESG considerations into their processes.

Sustainability technology concept

Enno Dykmann

Treasurer
Alliander

Geeta Sharma

Director, Portfolio Manager

BlackRock logo

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ESG and sustainability are a major focus for companies in today’s environment. But where sustainable investing is concerned, it isn’t always clear exactly what investors should be looking for, or how companies can go about formulating and adopting a sustainability strategy. So what does a sustainable investment strategy look like in practice – and how are fund managers integrating ESG into their actively managed mandates?

Building a green funding structure

Dutch energy network company Alliander is currently undergoing an energy transition which involves connecting renewable energy sources to the grid. As Treasurer Enno Dykmann explains, the company’s favourable sustainability profile has enabled it to become one of the highest ESG-rated companies in the utility sector, as well as laying the groundwork for a sustainability strategy within treasury.

A key focus of this strategy is on obtaining green financing, and the company’s first green bond was issued in 2016. More recent developments include a green euro commercial paper issuance, and the company is currently amending its revolving line of credit to include sustainability-linked features. The last piece of the puzzle is gaining the ability to invest excess cash in green money market funds or green deposits.

“As we’re not always able to use the green bond proceeds directly, we find it important to have the opportunity to temporarily invest this excess cash in a sustainable way,” says Dykmann. While this wasn’t possible a few years ago, that changed when BlackRock got in contact to discuss the possibility of investing in sustainable money market funds – “so we immediately expressed our interest in such products. With that final element in place, we have a full green funding structure, which is something we are very proud of here at Alliander.”

ESG integration

At this stage, it’s clear that some companies are advancing their sustainability objectives more aggressively than others. Nevertheless, Geeta Sharma, Director, Portfolio Manager at BlackRock’s International Cash Business, says that social and environmental considerations are increasingly “becoming the standard, and not the exception.”

She explains that where the cash investment process is concerned, BlackRock has focused on integrating ESG into its actively managed mandates “by expanding the scope of the risks we consider into our security selection process.” Sharma adds that this is increasingly becoming the practice of choice by active managers – and indeed, ESG integration was the most commonly reported ESG strategy across all regions in the Global Sustainable Investment Review 2020.

To bolster the firm’s approach in integrating ESG to cash mandates, BlackRock has developed a proprietary ESG analysis framework which specifically addresses gaps in ESG ratings coverage of money market instruments, and enables cash portfolio managers to access the data points needed to make informed investment decisions. On the solutions side, meanwhile, BlackRock has incorporated minimum, or baseline, standards into its European money market funds by introducing exclusionary screens across a range number of factors.

Environmental tilt

At the same time, the firm is focused on understanding its clients’ preferences – “and we really value their insights, because what we’re trying to do is develop solutions that ultimately meet their ESG objectives,” explains Sharma. This, in turn, has led BlackRock to launch a range of thematic environmentally focused funds that invest in issuers with better environmental practices, as well as using part of their net revenue in carbon offsets.

As Sharma explains, this is a strategy that involves bringing together two key components – namely a cash investor’s traditional money market investment objectives, and an inclusionary environmental tilt – alongside the use of exclusionary screens. She comments that the environmental tilt is something “that provides a clear differentiation,” and involves emphasising investments in issuers that are best-in-class when it comes to thinking about climate change and the environment more broadly.

Evaluating ESG

For asset managers, determining the right way to capture ESG is an important part of the equation. Sharma says that governance is a key factor – “and we marry that with the fundamental credit assessments that we do to work out which banks are more distinguished in their lending portfolios with a focus on ESG risks and considerations.”

Data can be a particular challenge. “There are a lot of ESG providers out there, and a lot of those are largely redistributing raw data,” says Sharma. In the short-term debt markets, Sharma and the BlackRock team feel there is an ESG gap in the industry they are trying to solve through proprietary analysis, as well as “marrying together quantitative and qualitative factors in a way that’s more focused on our cash portfolio investing strategy.” Moving forward, she notes that regulatory initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD) will help to improve not only data quality, but also the comparability of that data.

Partnership approach

Last but not least, Sharma observes that banks are currently moving at different speeds in terms of their commitment to sustainability, which can lead to certain challenges. “We recognise that we’ve got to partner with them to highlight what we need as investors and what we’re seeing from our clients, to help them make those developments internally,” she concludes. “We think that the partnership approach will ultimately lead to greater alignment, and ultimately a greater impact on client portfolios and their sustainability goals.”

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