ESG expertise is indispensable

Michael Huber believes that sustainable investment requires more than just comparing ESG ratings. According to the fund manager at Raiffeisen KAG, in-house ESG expertise is indispensable. The individual companies being considered for investment must also be evaluated very carefully.

Interview with Michael Huber in Börsen-Zeitung, 23.7.2022

Mr Huber, what do you feel about the EU adding nuclear energy and natural gas to the Taxonomy, thus classifying them as sustainable?

We are very critical of this. It shows that the EU is controlled by a large number of lobbies. And the interests of individual countries also play a role. The countries that have invested heavily in these energy sources over the past years are reluctant to implement the costly energy transition. So we are also not surprised by this turn of events. But as investors, we stand by our conviction. Nuclear energy has no place in our sustainability funds, and will have none in future.

Put perhaps somewhat simply, everyone wants to be sustainable now. Is this even feasible, and if yes can sustainability then still be a sensible differentiator?

There is a problem in that it is very difficult to quantify and describe sustainability because it is not a matter of black and white. There are many examples where the sustainability of companies must be verified. When you involve third-party data providers – which you need because it does not make sense to determine the water consumption of thousands of companies, for example – it is crucial to then conduct an internal analysis of the companies that have made it onto your short list. This is not about looking at every single key performance indicator. But it is important to examine the business model and individual divisions in detail. There are many companies that have good ratings but that are not really sustainable when you look closely. Many companies that would be good choices in general have problems.

Can you give any examples?

Companies in the food sector. A major conglomerate in the sector may have acquired water rights, for example. In such a case, it is important to find out how water resources are used. If the acquisition of water rights forces the poor population to buy water at a high price, this is problematic from a sustainability perspective. The same is true of water scarcity and receding groundwater levels. This is also a reputational risk that investors must be aware of. It is not always possible to avoid every problematic issue. But it is also not enough to invest in a company just because it earns 80 of 100 possible points from a research agency. This is why we have chosen to address the topic of sustainability comprehensively, and why we conduct our own analyses in relation to certain future topics. Looking at ESG ratings alone is not enough We conduct our own analyses.

Are ESG ratings perhaps a problem?

It is something of a problem in our industry that in principle, an ESG analysis can be completed quickly on the basis of ratings. For us, it is important to establish our own in-house ESG expertise. As a fund manager, it is also important to be able to evaluate the data – sufficient time must be invested in this. Otherwise, you run the risk of having companies in the portfolio where certain problems are overlooked.

There has even been talk recently of awarding an ESG label to arms companies. Would ESG make any sense at all if this comes to pass?

Attempting to depict arms companies as sustainable because they serve defensive purposes is a typical greenwashing issue. Especially US brokers are trying to push this initiative because they are being influenced by the lobby and the arms companies. They say: "We are only helping defence." That is very dubious.

Tip: Read more in Can weapons secure peace?

But one impetus behind this was the war in Ukraine.

Rheinmetall advocated for the classification of the industry as sustainable in this context. By this, I do not mean to say that Rheinmetall is intentionally engaging in greenwashing. But we rule this industry out in any case. And we have no way of assessing whether certain weapons are used for defence in specific cases. For example, weapons are also being supplied to Saudi Arabia, and we know that this country is conducting a military intervention in Yemen.

It is very unlikely that a fund manager would include arms companies in a portfolio that is claimed to be sustainable, is it not?

There are in fact some fund companies that do this. They claim that the weapons serve to preserve peace. But ultimately, the desire to invest in these companies is fuelled by the high growth rates that they will enjoy in the coming years because military spending is increasing rapidly. It is very opportunistic to label an industry as sustainable just because it is performing well at the moment. This is not a sustainable approach.

What other sectors besides nuclear energy and armaments are off limits for you?

Aside from nuclear energy and weapons, we also exclude the tobacco industry and pornography. Further categories that are tricky are labour and human rights violations. This must be examined in detail. We also exclude animal testing that is not necessary or legally mandated. In terms of energy, the use of coal and oil are key issues. We have not had oil or coal in our core sustainability portfolios for a long time. Natural gas is a stopgap that we still need. In this case, we defined a revenue limit of 5%. However, we want to see a plan for exiting gas activities from these companies.

What sectors or segments are interesting for you from a sustainability perspective?

We are interested in the companies that offer the solutions to the problems, and not those that use the solutions and are in fact partially responsible for the problems. Positive examples include companies in the circular economy such as the Norwegian firm Tomra. It sells reverse vending machines for bottles and cans. But the company also has other interesting products such as a laser technology that can differentiate between the different types of plastic with 99% accuracy. This can increase the recycling rate. However, this also requires someone who is willing to collect the material. A great deal of plastic is still being incinerated. Government policies are still lacking here. Uniform plastic standards could also be adopted. And then there is the financial aspect. You need buyers for the recycled material. The primary input material for the production of plastic is petroleum, so there is a problem when it is very cheap as was the case two years ago. That being said, the currently high oil prices are advantageous because recycled plastics are worth it now.

Can you name another example?

Borregaard, another Norwegian company. This company manufactures a range of product additives from wood that would otherwise be based on petroleum plastics. In fact, Borregaard is a sustainable bio-refinery. Their products include biopolymers. They can be used in nearly any product imaginable from fertilisers, animal feed, and additives for batteries to paint. Other products of the company include cellulose, biovanillin, and bioethanol. This also shows that wood as a raw material is far too valuable to burn. We can obtain many substances and materials from wood. It is important to use wood wisely, and to not waste it.