German asset manager DWS will increasingly integrate environmental, social and governance (ESG) criteria into its investment process, as it considers them vital for its future operations.
Stefan Kreuzkamp, chief investment officer (CIO) at DWS, said at a press conference: “ESG is not a trend which is going away; it will be our license to operate going forward.
“So clearly, we try to avoid sectors with higher climate transition risks; like utilities, energy or materials, and we try to overweight sectors with lower climate transition risks, in particular IT financials and healthcare,” he said.
Petra Pflaum, Emea co-head for equities and CIO for responsible investments at DWS; highlighted that, despite certain sectors having high risks in the low-carbon transition, they “always [have] opportunities” as well.
The utility sector, she explained, belongs “to one of the biggest climate risk sectors, but within the utilities there are around 10% of companies which will profit from the trend because they are, for example, water utilities, renewable utilities or renewable companies”.
To identify these opportunities, DWS analyses each sector and each company individually, Pflaum added.
DWS applies its proprietary DWS ESG Engine approach, to determine the ESG quality of a company.
This includes a climate transition risk rating to identify, among others, climate transition leaders and laggards, DWS wrote in a recently published paper.
The firm integrates ESG by using data from three providers – MSCI, ISS and Sustainalytics – and supplements this with data from S&P Trucost, ISS-Ethix and RepRisk, which gives it access to more than 35 million data points for over 10,000 companies.
The data providers offer different techniques to capture transition risks; by analysing, for example, carbon intensity metrics, carbon pricing scenarios and climate-related opportunities.
By combining these methods, DWS aims to capture these risks across multiple dimensions.
The DWS paper found that new business opportunities will develop from an expected increasing demand for materials, such as copper, used in low-carbon energy and industrial technologies.
Meanwhile, within the mining sector, for example, the availability of water and energy will likely constrain the establishment of new operations or make existing operations uneconomical.
The climate transition risk rating methodology is part of DWS’s ESG screening, and will be applied to all ESG funds, the paper said.
Its excludes companies with excessive climate transition risk which are rated an F according to its inhouse scale.
Those rated E or of ‘unknown risk’ are limited to 5% each.
Pflaum also pointed to the existing correlation between ESG criteria and a company’s performance.
“We include all the financially material [ESG] criteria into a company’s valuation. And we have seen, over the last years, that especially the poorer-rated companies have underperformed,” she said.
Events where companies are re-evaluated due to technological change, climate-focused regulations or changing consumer preferences are already happening and may become more widespread and significant in the years ahead, the paper stated.
Pflaum said that the Shareholder Rights Directive will require DWS to do more engagement with companies and report about it.
From next year, as a signatory to the Principles for Responsible Investing, DWS will also be required to report under the Task Force on Climate-related Financial Disclosures framework.