You are listening to Redefining Energy. Your co hosts from Berlin Gerard Reed and from London Laurent Sagalam. Today on Real Defending ERG, we're going to talk about ESG. Oh, I love it, and of course is ISG dead? I think ISG is dead? Yeah, I think we just need to change the Yeah, I agree with you. But first award from our historic partner, DLA Piper. DLA Piper's leading energy transition practice advisors are more deals
and projects than any other law firm in the world. They advise clients across the entire value chain over a project's full life cycle globally. Yeah, we like jel Bier very much. Excellent lawyers, absolutely your own. Absolutely Back to ESG, which are you? Just have to look at the guy who went from hero to zero of ESG, mister Larry Thing, the CEO of Blackhawk. Four years ago, it publishes this famous letter ESG or bust and now four years later I said, mah, I didn't say anything. Sorry.
What has We've been moan and grown about ESG for quite a while? A rating system that gives a better mark to Xcel Mobile than TESLA raises my eyebrows again say the rating system is wrong. It is that that you're bundling ES and G. And actually what we're saying is from an x on Mobile point of view, there G is better than Tesla's and that's the case, right, Okay, But let's say on the E and S side, Tesla has definitely had a much more positive impact than x on Mobile. So I
agree, that's why we have to change it. There was a crazy hype four years ago and the amount of funds labeled ESG went to seven trillion dollars. Of course, all of a sudden, a lot of people got very interested in managing the gigant tea cake. But recently, for the first time, you're starting to see outflows. One of the reasons was the performance of ESG level product has not been very good. I think. Also the point about this is when people look in the portfolio as well, they sort of
go, well, that's not what I signed up for. But ya, rather than babbling, it's probably time to bring a real expert. Jean Jacques Barbaris. He is Deputy CEO, head of Institutional and Copyright Division and ESG at Amundi Asset Management, and Amundi is the largest EU asset manager. Well, let's bring him on the show. John Jack, Welcome to the show. Thank you very much for having me. Well, Jean Jacques, there's a bit of an ESG backlash. To say the least, do you wish
you were back five years ago? The answer would be directly no. Maybe being back five years years ago we'd make the life of asset managers easier because in that ESG was extremely popular or maybe less criticized than it is today. But I wouldn't wish to be back five years ago for one reason. It is because if there is an ESG backlash today, is because I'm deeply convinced that because it has started to bite, meaning it is because it has an
impact. It is because it has an effect that it creates some reaction, the ESG backlash that we see in the financial sector, but not only by the way, and you've got a number of parties in Europe that are putting an anti transition agenda as part of the political offer, so we see that transition has become an element of the political debate. It's the same in the financial sector. That's where the ESG backlash comes from, because it has started
to have an impact. If I take a very practical example, it is because there is more and more exclusions on some fossil sectors being applicated by a number of investors that in a number of American states taxes to name them, that we've seen a political reaction against investment practices that somehow were targeted against the local economy. Again, I wouldn't like to be back five years ago, because five years ago we were probably starting to be impactful. Now we are
technically speaking. Five years ago we were at the moment where HE has just started to be integrated into investment processes. It means that we were really trying to encapsulate the overall S and gvision into the investment and now we're moving, particularly in Europe, to something that is much more targeted, meaning the whole ESG basket that is encapsulating a lot of different dimensions is more and more challenged
because it's not in packed full enough on some aspects. And so therefore I think we're moving after five years, in two directions where we do focus on more specific things. To be precise, I don't think I have any more an ESG conversation with an institutional investory in Europe we're only having conversations about how to align their portfolios under carbon budget constraints. I also believe that part of the ESG backlash is the amount of green washing we've seen where all of a
sudden, you are a lot of funds who were rebranded ESG overnight. Can you talk a bit about that old green washing thing and how did you leave it? And everything was green all of a sudden, if you call a spade, there was an absolute need to clarify what it means to be an
ESG fund or a green fond. And by the way, there are some investment companies that have started to see that playing that little game of promoting something as green something that was not at all can be extremely costly from a reputational but also financial perspective. When BWS Deutsche as a management was accused of a potential green washing scandal in Germany, the stop price dropped down by thirteen percent
in the very same day. Now, the green washing question is taken extremely seriously by the investment community because it is a major financial risk for them at the moment. What is changing progressively the landscape and makes things more credible is the regulation that progressively is helping investors to clearly understand what is in a fund
that is denominated as green. I take a practical example, if you're an invent and you invest into a Parcelain benchmark fond, which is a European label, you have the absolute certainty that the cabin footprint of the potfolio is diminishing by seven percent every year because the index of the fund evolves to produce that result. And these evolutions give more transparency, consistency, and credibility to what
we try to do. John Jack. The thing that really frustrates me about the E, S and G is I don't believe that they belong together. And where I come from is in particular d G the G is governance, and I expect you as an asset manager to be investing in well managed, well governed business. I mean this is for me a given the E and the S different story. That's externalities. I want to invest in your fund
so that you really are pushing that environmental social element. And the practical example I give them it is if I just used example of Tesla for me. Tesla has been really good in terms of E and the S. I really think they've changed the world. But on the G side, I mean sorry. You know, when I see Ell lost three hundred and three million split just to shares package which could be worth forty billion, I say, it's just really bad governance and this can't be. But on THEES side, I
know it's done grace. But I'm sure there's lots and lots of examples of this. So I just love to hear your views on the trade and do you think I'm right what I'm saying? And do we split this going forward to how do you say it? I think you're right. The ESG object that materializes practically speaking, into ESG ratings, This is the basic ESG element
that is being used by investment managers to integrate ESG. You have an ESG score that is applicable to a company that is made of the different parts. Ultimately at a MUNDI if you're rated on ESG from A to FG, meaning that you're excluded. It is a score that encapsulates a lot of different dimensions. For instance, it is not by maximizing an esgscore in a portfolio that you're going to deliver an impact on climate or carbon reductions emissions of your portfolio.
The average part of what climate represents into an ESGER rating on the market and the ones that are provided by masisst Analytics or others is roughly twenty percent. Okay, So it means that if you try to maximize the esgscore,
you're not going to have a super strong climate ambition through that scoring. To come back to your question, more and more, what we will see is the ESG concept as a basket of plenty of things being more split, the governance part being traditionally already addressed by the financial analysis you take into account. What is the good governance when you make an investment is a good example of
that. And then even moving forward by having the impact splitted into more specific issues that you want to tackle, climate big one, natural capital being one, and others. In a nutshell, the ESG concept is going progressively to disappear to go to much more specifically oriented impact that wants to be generated by the investors, climate being the first one. Now digging into what you said about indexes and reporting agency and on the way I see it is you are
faced with two levels of ESG. The first are the equities you invest in, and then the second is the obligation you have as an investor. So if we go back to the first aspect, we've got voluntary reporting it's called sus BSBTI WRI, International Sustainabiity Standard Board, and of course mandatory that's in Europe. We're going to have corporate I'm reading my notes because I get lost
in alphabetsu Corporate Sustainability Reporting Directive CSRDS. And then you've got all those rating agencies MESCI but I mean I guess there are dozens of them which publicly scores. How do you sort that mess? First, we try to navigate into the mess. It means that the first thing that we do is that we require almost all of the data that is on the market to be in capacity to look at each of them, the methodologies that are behind, and to
be selective. So the idea for us is not to be linked to one specific method or one specific criteria in particular, and to build up our own assessment. Then when it comes to climate in particular, we're going to focus
first on real metrics, meaning theotry reportings and real missions reportings. That's where you have a potential issue because there are some sectors that have mandatory reporting requirements on which you can rely Because they are publicly audited etc. This is, for instance, the case of sectors in Europe that are under the European trading schemes, so the carbon market, so you have reporting on that. For other companies, for instance in Europe, you need to rely on their voluntary
reportings according to all the different standards. At the end of the day, by crossing the different ones, you have a relatively good idea of, say, the validity of what is reported by the company. So to navigate into all this going forward, what is going to change that we're going to focus more and more on the raw data that are published by companies under mandatory public
obligations. And this is what the awful acronym you mentioned CSRD is supposed to help us in Europe because it will force listed companits to report on probably way too much by the way, but one thousand different data points and that will, if it's properly done, going to change the landscape of the ESG ratings, etc. Because it means that you will be public data available that you
can work on and rely on in a contarable matter. The big problem that we'll face in Europe is that at dominent there is no system to centralize that data, which is the case in the US or in the US you've got everything that is on the website of the SEC, the American regulator. In Europe, we are supposed to have what is going to be called a single access point, which I hope I will see before I'm retired. That is probably the thing that will change our life in this ocean of data and metrics.
And the second aspect of the regulation is the one you are subject to as an asset manager. And there was this taxonomy I nuclear and gas not very clear, but also there is article eight, article nine. I mean, can you explain a bit what's going on you as an asset manager?
What regulation are you subject to? Yeah, if I may take a little step back, I think it's super important to understand the European regulation landscape, to understand where you comes from and that subjects and if you come from that subject on the idea that ultimately to provide the right allocation of capital to the transition, you need to have the right decisions being made by the individual investors,
which is a very strong principle. One may decide that you need to force that allocation, but the idea is, let's rely on the free choice of individual investors. And therefore, let's build up a system that allows the individual investors to take enlightened decision. And to do that, the second step of the regulation is, therefore we need to define what is green or sustainable to make the investor in capacity to do its allocation based on enlightened choices.
That's where the taxonomy comes from. Taxonomy is basically a percentage of green activities in a portfolio. To make it very simple at the moment, taxonomy eligible assets in a traditional investment universe such as MSCI World. MSCI World, it's the largest equities in the world, it's basically six percent, and the largest contributor to that. By the way, GIRLD is Tesla. It's amusing,
but it's it's just to put a little flash around that. So taxonomy define what's green SFDR, not getting into an acronym, which is article in an article nine helps to define what is sustainable, so not already green, but sustainable and based on the percentage of that in a portfolio helps you to categorize eight or nine. So that's what we're subject to. We're subject to report either take commitments based on the level of green nitude or of the portfolios according
to taxonomy or SLDR. The big question is does that work? Does that move an additional penny to the transition? And on that if I'm a little provocative, I think we can have relative strong doubts because it is absolutely impossible
to understand to the end investor if you don't have an ESGPHD minimum. It's impossible at the moment in Europe to have a proper conversation with your banker, because your banker, when he's supposed mandatory wise I hope geryld and Laura you've been subject to that by your banker, but normally supposed to classify you as a responsible investor and to ask you questions such as what is the percentage of taxonomy digible assets you want in your investment, which normally, when you have
heard that question, you've not understood it, and so your bents or no, or you say you don't care, and so basically it doesn't work. I think the problem we face at the moment in Europe in particular is that the whole purpose of that regulation is to put the individual investor in capacity to exert its responsible investment preferences, but as she or he is made totally in incapacity to understand the questions that are being asked. I have a little doubt
on the fact it works. John Jack. I'm laughing here in the background because I've experienced this so I know what it is. And actually I used to run an eschief fund and I did not understand the question. It actually brings me back to one thing, which is I don't think we should get lost in the regulation. I think actually we should go back about it's all about making money in this. So I suppose my question to you is how
have es chief funds performed? A very good starting point of any conversation with a retail investor in not to use the word ESG. My mother doesn't understand the word ESG. We need to simplify the transition questions to make them accessible to read investors. If you look at the data on the ten years basis so forgetting the two or twenty two blip that was due to the energy crisis.
Quantitatively speaking, the ESG indices are beating the traditional indices, and even the net zero indices are beating the traditional in thises and overall, you can if you make a content analysis a company that has a better ARG rating than its peers in the same sector tend to have a higher price of its security and a lower access cost to capital. What is the reason behind that?
Is it due to fundamentals or is it due to the fact that during the past years, in particular, there was such an increased demand for companies having better ESG profiles that demands had an effect on the prices, which is not
a problem, and the markets are driven both by fundamentals and representations. The question is at some point in time, when ESG becomes a super large part of the market, that natural effect stops and you're coming back a little bit to the fundamentals, meaning is a company that has a strong transition plan, better position and will provide ultimately better profits to its shareholders. And I think that's exactly the moment we are at, to come back to the very first
question of law. I think that's also why we have at the moment an ESG backlash question again of the political questions it goes where after a decade, particularly in Europe, where ESG now represents a super large part of the market, where nobody was re asking questions about it, its as just something natural and now we're coming at the moment where it has become a super large part
of the financial market that the traditional questions rises again. I like your answer, and I'd like to go to the reverse side, which is you said that there was possibly a premium for some of these high rated s two companies, which I agree with. What about the companies that are the producers And I'm thinking as an irishman, I'm thinking of CRH, which is the largest semount producer in the world. It's actually, if your account for it's fifty
percent of Irish emissions. If it was counted that way, it's not, but if it would be. But they've just delisted in Ireland and they've gone to the US, and I suppose the question is is that because of this or is it because of something else? And if that's the case, are we going to see shell total etcetera, etcetera going on the same rich It is absolutely true that European investors are more demanding on these questions and transition pass ways of companies. That's a part of the US, and I say a
part of the US. I think it's important not to see the US as a block there. US market is very divided at the moment, You've got a deep division. It's not at all the same if you're an ESG player in Texas, you don't have the same conversation in New York. This being
said, this is absolutely true that the European investors are more demanding. If you look, for instance, last year at the level of support of European investors to environmental shareholder resolutions at general shareholder meetings of companies in the world, it has been massive support, whereas the support of American players has massively dropped down. So there is clearly a division of the world happening at the moment.
Does it mean that this is the fundamental reason why some companies are delisting from Europe to go to the US or are contemplating to do so. It might be a componentce I doubt a little. You just need to have in mind that the number of investors and amounts in equities in the US is much larger than in Europe, and therefore that there is also an economic interest for companies to list there. But I'm pretty sure that some companies are also considering
that being listed in the US they will have less sustainability pressure. Jacques it's not just about picking stocks. It's also about what we call engaging and you probably expect me what engaging means. So your company a mundie, your large just asset manager, you have been joined by twenty six investors demanding that Shell improve its in nontal target. Does it work? How does it work or is it just a reason for Well to say bye by London, Welcome New
York. Just coming back to what engagement means in terms of definition or stewartship in a British environment, It's basically a shareholder dialogue. It's the dialogue that you have as an investor visavi company you're invested in and you're discussing with the company on its strategy. So it's very classical thing. That's something that you do as a shareholder on a traditional items govenance, dividends the capex for the
strategy. It's exerting your role as a shareholder of dialogue with companies that has now a very strong sustainable dimension for a number of investors, including us. The large part of the engagement we do is unsustainability questions. Last year we engage two hundred and twenty five companies in the world, so that's a lot an engagement. Practically, what it means, it means the analysts in a
mundee that are discussing with the management. I personally do a lot of engagement myself as your level of a number of companies, and for instance on climates. When we engage a company on climate, most of the time we ask three things. Define the transition passway that is compatible with carbon neutrality, present it to your general shareholder meeting and report on it annually. And third half compensation, keep you eyes of your management that are attached to the execution.
Okay, So that's what engagement meets. The big question is does it work. It's very difficult to assess. But if I take a step back, when we founded with a number of other asset managers the net zero Asset Manager Initiatives or the largest asset manager coalition in the world on net zero, there were like eight hundred companies in the world that had climate commitments. Now you've
got eight thousand. I strongly believe that it's partially due to the fact that the shareholders such as US are pushing that agenda a lot visa with these companies, and that's something that has really impact because it's true the carbonization of the real economy going forward, because it's the transformation of the business model of companies. So I think it does work, but it needs to be done very professionally. Active engagement is not activism. You need to explain to a company,
this is what we expect for you to do. The company would say this is what I can do or not and have the right dialogue about that. When we're in the position to file or cofile or resolution to encourage a company to do more, it means most of the time that our engagement has not been that successful. The number of resolutions we do not put on the table or we do not cofile because engagement has worked is way higher than the
number of resolutions we support. That's where we believe we are not here to behave as an activist, but as a shareholder that taking into consideration its fiduciary duties, it's also promoting a transition agenda. We believe it is in the
interest of our end clients. John Jack, just as the last question, maybe we're talking a little bit of a few of investing in ESG and and I'd also like you to touch on the whole active versus passive management approach and what that means and how you see that going forward, or just maybe for the orders in case they're not familiar with what active management and passive management is.
Passive management is replicating an index. Okay, So if you take a French rand is the management you do is you just replicate the performance of the account and this is what you're invested in as a client. And by definition it's an asset management technique that is relatively low cost and therefore low price. Okay, but you just replicate what the market is doing, okay, where
active management. The ambition that you have under active management is you try to do better than the market, and it's traditionally an asset management technique that goes with higher costs. And for the end investors when it comes to ESG and in particular transition investment, you can use the two techniques to achieve these kind
of goals. Two practical examples. If you want to manage a portfolio under a carbon constraint, so you have a carbon budget of embedded emissions in your portfolio on the PATHI side, you can do it by having the index evolving to deliver a carbon result. So the progressively, the index is going to be focused on companies only that are in line with the carbon trajectory that you want to have, but it's going to be automatic. Where on active management,
what you do you're going to define a carbon budget. So let's say, for instance, the seal too intensity of your portfolio is one hundred by nine nineteen. You want it to be at seventy by two twenty five and thirty by two thirty and you're going to make active debts under that budget.
So you're going to choose companies based on the transition passways you'll believer credible at the end of the day, you will deliver the same results in terms of carbon footprint reduction either active on the passive side, but you're going to do it differently, and probably on the active side with much less biases and potential impacts on performances than on the passive side. That is going just to evolve
automatically. That's what fundamentally differs between the two techniques. On transition and going forward progressively, what we'll see more and more is less and less generally as g integration and more and more focused ambitions, and notably integration of alignment constraints into the portfolios. If all the commitments that have been taken by the financial community and asset owners in particular our nets, this is the future of responsible
investments. Well, Jean Jaques, it's a great way to end it. Thank you very much. We learned a lot and it's good to see that there is some real work being done behind the headlines. Thank you very much for coming on the show. It's been great having it. Thank you very much. Thank you so much for having me. It was a pleasure. Solaurn. We were actually all on the same page, which is a bit of a surprise to me. Yeah. The first thing is I'm absolutely discombobulated
by the alphabet soup of all those standards, reporting rules directive. It's heavy, heavy, heavy, and I can understand that well, especially the polluting companies are not very happy with that level of scutting in. Yeah, without a doubt. The question that sort of was remain on my head, which I want to ask you, is really, to the fossil producers just leave Europe and deal list and go to the US or go to Asia when push comes to serve and if they want to be in a gener or lax environment,
they should not even go to New York. They should go to Texas. Texas is going to open their stocky change with their own rules, and well it's going to be Texas babies. So I mean, I think there won't be any ESG criteria whatsoever. The problem I see, and it's really a US problem, is that the US is the biggest financial market in the world. Now when you look at fossil fuel investment versus energy transition investment,
and there was last months a very interesting report by the IEA. Europe and China invest four times more in the energy transition than in fossil fuels, but in the US they invest more in fossile fuel than the ind energy transition. At the end of the day, all those debates is always linked to oiler.
That's true, and that's actually E. Yeah, if I be really clear on E, and that's about environment and the ESG, and that's actually what I'd like to see going forward, because I have no problem investing an e FONT that actually is actually even quite activist in terms of investing in some of these fassil fuel companies and then trying to force change and stuff. I'd
love to do that, but it's very hard to find them. And then, as I said, when you mix in the S and g in it more, just as I said, it becomes as you say, it's an alphabet soup. But I think it's just it's just a mess. Well, Job, as usually your dreamer, and I'm going to give you two numbers. On average, if you take Big Oil, only four percent of their capex goes for green stuff four percent. But if you take the two trillion
of green investments, less than two percent is made by big Oil. So in fact, these are parallel universe and really trying to make Big Oil go green. I think it's wishful thinking. Yeah, probably right enough, And listen, at the end of the day, we haven't needed them up to now. The reality is we are in a transition where these guys have huge power, and you'd like to see them sort of begin to move at least
in this direction. Right, Okay, Yeah, maybe I'm just dreaming, right, Yeah, you are, you are, But it is a pleasure to talk with a dreamer. Job. It was a great conversation with Jean Jacques. You really know what he's talking about, so, yes, jeez, or asset management is managed by sales people, so that was a bit of a relief. God, all right, my friend. Well, I enjoyed that conversation. We thank Dly Piper for supporting our show. Thanks guys
and Joe, I talk to you next week. The forwarders thank you for listening to Redefining Energy. Don't forget to rate the show and subscribe on Apple Podcast, Spotify, or the platform of your choice.