Sustainable investing is an area of investment management that considers environmental, social and corporate governance (ESG) criteria to create a positive societal impact whilst achieving financial returns.
The development of sustainable investing reflects a move towards valuing the effect of ESG factors on financial return. “As the industry continues to mature, there are many challenges to overcome, but also reasons for optimism”, Mamadou-Abou Sarr explains.
What was your inspiration for co-founding V-Square Quantitative Management?
The idea of connecting investment with sustainability actually started with the thesis I wrote when applying to study at ESCP Business School. I developed a case study for a sustainable investing firm in sub-Saharan Africa.
ESG has been within me from the beginning. Also, my father is a professor of molecular genetics and biodiversity so I was raised with an appreciation for conservation and nature.
The beginning of most career paths is akin to a random walk. I started my career over twenty years ago as a currency trader with a desire to hone my technical skills and understanding of capital markets as I developed a passion and expertise in sustainable investing.
Once I found my passion, my target was clearly based on my fundamental belief that profit maximization can, and in my opinion should, work hand in hand with sustainable investing.
Before co-founding V-Square, I was the Global Head of Sustainable Investing and Product, developing and leading a sustainable investing platform. Throughout my career, I have trained and apprenticed at large firms, run teams and departments, and managed assets while acquiring the skills to launch my own investment firm.
Since I entered the industry, I have never lost sight of my desire to become a vector of change in the asset management field. As a leader, when you’re in control of what you’re building, you can shape an organisation the way you want by attracting outstanding talent and driving fast-paced innovation.
Once I found my passion, my target was clearly based on my fundamental belief that profit maximization can, and in my opinion should, work hand in hand with sustainable investing.
The V-Square tagline is ‘Sustainable Investing Reimagined’. How is your approach to sustainable investing unique?
ESG criteria cover a vast area, with a plethora of metrics. When I co-founded V-Square, I had an informed view and global expertise on sustainability issues gained by thousands of engagements with investors, academia and regulators around the world, discussing ESG integration across asset classes.
As an investment practitioner, I have seen the ESG industry move in an uncoordinated fashion, as if in a Brownian motion, leading to more complexity.
Nowadays, it is a daunting task to address the lack of consensus in industry standards, untangle the plethora of ESG data, navigate a range of scoring methodologies and assess the relevancy of ESG signals.
Our vision of sustainable investing focuses on materiality and profitability. This quantitative process allows us to make sense of the deluge of ESG data and to help drive informed investment decisions. We are focusing on four themes:
- Materiality: Across the E, S and G factors, we believe that only a subset are financially material and that’s what we’re focusing on as an investment thesis.
- Human capital and technology: We look to assess the strength of companies holistically. A company’s ability to create value, hold financial sustainability, remain relevant and grow cannot be achieved without maintaining sustainable human capital practices whilst capitalising on new technologies. We seek to identify data related to material human capital and technology factors and integrate these metrics into its investment decision-making process.
- Climate change: Climate change creates risks and opportunities for investors. At the portfolio level, climate risk may have a disproportionate impact across asset classes. Our investment approach integrates a long-term view on climate risk through our global macro model, combined with a bottom-up approach supporting the transition to a low carbon economy.
- Governance: Understanding how a company is run is important to assessing it as a potential investment opportunity. Investors have an important role to play in engaging with companies to help them adopt best practices to capture opportunities and mitigate risks.
How has sustainable investing evolved since the start of your career?
In the mid-2000s I was an outlier at ESG conferences as I questioned the relevance of ESG factors in portfolio constriction and the lack of data. When I started in the field, ESG disclosures from companies were fairly limited and inconsistent.
Fast-forward to 2020 and nearly 90% of the S&P 500 companies are now publishing ESG reports. The field has evolved drastically over the past decade.
This brings another set of challenges for investors and regulators. The new wave of global regulations, including the climate disclosures proposal by the SEC in the U.S., signals a step change in our industry, calling for more oversight.
How do your clients view sustainable investing?
It differs from region to region and client types. Even though the business case is compelling, certain clients need to be convinced, while others have strong views on the outcomes they are trying to achieve.
We enjoy fascinating conversations with clients ranging from education to portfolio construction and driving innovation in this space. We are well equipped to drive innovation and that’s a key advantage of V-Square.
Sustainable investing is also starting to receive some backlash around greenwashing and financial reporting. Where do you think it needs to improve?
The lack of consistent standards was, for a long time, the main issue in the sustainable investing field. The consolidation of major standards organisations over the past few years has been a great step forward to providing clarity.
The EU green taxonomy and other industry initiatives are an attempt to address the concerns of investors around greenwashing where there is now a harmonisation of the labelling of ESG financial products.
As an industry, the metrics we use and their advocacy in managing the risk and return characteristics of portfolios need to be transparent.
What challenges and opportunities are still to be faced during the second part of 2022?
I always say that trends can be your best friend, but also your enemy. So far this year, we have faced headwinds in the financial markets with a lingering pandemic, inflationary pressures, slower growth and a war in Europe.
The ESG space is not immune from the impact of these global trends and therefore our industry is being tested on multiple fronts.
Specifically for ESG investing, the typical underweights to the energy sector and overweights to the information technology sector have impacted the performance for some managers since the beginning of the year.
The jury is still out on a potential rebound of the information technology sector in the second part of the year.
Is sustainable investing the future of asset management?
Naturally, I believe so. To me, sustainable investing is more than a trend. It is a paradigm shift in the way we assess companies and negative externalities.
Mamadou-Abou Sarr is the co-founder and president of V-Square Quantitative Management, a global asset-management firm focussed on sustainability.
V-Square develops and manages customised passive and factor-based portfolios, and provides analytics to integrate ESG into portfolio, risk management and reporting.