Alexandra Russo is Head of ESG Client Portfolio Management for the US & UK with Candriam, a USD156 billion global asset manager pioneer in sustainable investment, which has worked on a number of ESG ETFs with IndexIQ.
She joined the firm in the US a year ago, having found herself increasingly following the ESG investment path. A previous appointment saw her working with another European an asset manager that had a focus on sustainable investing, and she noticed the marked difference in appetite and concern for all things ESG between the US and Europe.
“I started out in more general equity investment,” Russo says. “When I got into the space six years ago, I spent time in Europe and my eyes were opened to ESG investing in general and the fact it was under discussed in the US and I made it my mission to bring it over to the US.”
Russo observes that in the US the approach to investing has traditionally been different from that in Europe. “From a financial perspective the American philosophy on investing focussed on financial returns and there has been conflating terminology which makes people think that ESG data is going to force you to sacrifice returns, which brings up a lot of questions,” she says.
“The lack of uptake continues to focus on ‘what are we sacrificing’ but we need to bring it back that this data can have financial benefits plus additional environmental and social outcomes.”
The power of the ‘g’ in the ESG argument has been well documented over the years but Russo brings the compelling case that Candriam’s methodology has excluded Credit Suisse since 2014 due to information screened and flagged.
“Governance is always important,” Russo says, “but no one factor is more important than the others. We want to understand what is most material in the industry the company is operating in and in financial services, governance is hugely material, so a lack of strong governance is likely to cause some problems down the road.”
She likens ‘governance’ to the glue that holds everything together in a company. “Over the years, we had seen a number of issues at Credit Suisse relating to governance and it has played out in different scenarios from 2014, when the bank faced criminal charges for helping American citizens avoid taxes to 2022 when a lot of customer account information was disclosed showing they had exposure to various crimes. This demonstrated a two-fold risk and was an ultimate failure for the bank.”
Although unprepared to name who might be on their watch list at the moment, Russo says: “Governance is a piece that we continue to watch when we look at the banking sector in terms of high-quality risk management.”
She notes that if a company has good governance, the team would examine how much it is financing ‘dirty’ industry that could lead to risk. “ESG data allows us to be more informed investors and take a more common-sense approach,” she says. “We can’t ignore the information.”
Russo has written a blog entitled ‘Why ESG isn’t a political issue’, writing that ESG popularity has again hit a rocky patch, as the Russia/Ukraine crisis hit and energy prices soared in early 2022.
“Flows sharply fell, ending 2022 significantly below 2021 levels. (Morningstar as of 12/31/2022) 2022 was also the year ESG became a political topic, as each party ran on different conflicting trails, benefiting from the broad nature of the term,” she writes.
“That brings us to where we are today: on an unpaved, unclear path where some believe investors are not doing enough, and others believe ESG investors—including advisers, governments, institutional investors, non-profit organisations, foundations, etc. are violating their fiduciary duty.”
“It’s still a relatively new industry with no one definition, which allows different perspectives which can look very different from each other,” she says. “Underlying portfolios can look very different and be confusing. The criticism is coming because of a lack of understanding of what ESG is at its core and we as an industry need to bring it back to its base.”
In her blog, she cites the rapidly changing world which is creating a risk landscape very different from the one 10-20 years ago, with, according to the World Economic Forum, eight of 10 of the top global risks are environmental and social in nature, whereas 10 years ago the risk landscape looked very different and was dominated by economic risks.
The ultimate sin of greenwashing is also addressed by Russo, who comments that it was a marketing opportunity for asset managers in 2019/2020 to have ESG strategies. “As a result, it has brought some scepticism and because we didn’t have an ESG definition, everything got labelled ESG, which can lead to greenwashing – this will mitigate over time and is just part of the journey.”
In conclusion, Russo says: “The risk landscape has changed and climate change is very real. Extreme weather has cost us USD3.6 trillion since the 1970s and is only become more costly. The last decade was seven times more costly than the prior decade and ignoring these figures would be doing yourself a disservice as an investor.”