ESG investment strategies consider environmental (E), social (S) and governance (G) aspects in addition to traditional fundamental aspects such as micro- and macroeconomic information. The term "ESG investments" encompasses a range of approaches and is often used interchangeably with terms such as "ethical screening," "sustainable / responsible investing," and even "impact investments."
In our view, the social and environmental sustainability of a business model and the integrity of management teams are crucial factors for creating long-term value. To minimise certain risks arising from controversial business areas or problematic business practices, we use ESG exclusion criteria. We also place a strong focus on positive factors that promote and sustain earnings growth, such as good corporate governance. In addition to our own research, we use external ESG data to understand the sustainability profile of companies and issuers. We strive to identify material factors that are critical to improving long-term returns and the sustainability profile as part of a comprehensive ESG investment process.
We have defined three different strategies for incorporating ESG, which differ in the scope and depth of application of ESG instruments.
Our ESG SCREENED strategies are based on exclusions and restrictions of certain activities to minimise material ESG risks. Strategies in this category apply the Berenberg WAM ESG exclusion criteria, which encompass sector exclusions as well as very severe ESG controversies.
Our ESG INTEGRATED strategies apply a combination of ESG integration tools in order to exclude or limit certain activities, to consider ESG risks and opportunities as part of the investment analysis, and to positively influence issuers through engagement and proxy voting activities.
Our ESG TARGETED and IMPACT FOCUSED strategies apply targeted ESG approaches, such as positive screening based on a variety of ESG or impact criteria. Additional ESG exclusion criteria are applied in order to further limit investments in activities that do not support positive impact. ESG targeted strategies implement a specific ESG objective. Impact strategies only include companies, issuers, and project-based investments such as green bonds that have measurable positive impacts on society or the environment and contribute to solving global challenges.
ESG integration can vary significantly between different asset classes for a number of reasons. These can include for example availability, type and quality of data, as well as the stage of development of methodological approaches or even market conditions. The information provided here is therefore intended as a general description of ESG approaches across our different ESG categories. For a product-specific description, we refer to materials and documents provided in for each product.
We offer several ESG investment strategies with varying degrees of ESG consideration to meet differing client needs across equities, fixed income and multi-asset: ESG SCREENED, ESG INTEGRATED, ESG TARGETED and IMPACT FOCUSED. The level of sustainability consideration of our ESG strategies can be differentiated into an Avoid, Assess or Support focus.
Our ESG SCREENED strategies are based on the mandatory exclusion of certain business areas and controversial activities to minimise material ESG risks.
Our ESG INTEGRATED strategies apply a combination of ESG integration tools. These include the application of exclusion criteria, ESG analysis, and positively influencing through active ownership activities.
Our ESG TARGETED and IMPACT FOCUSED strategies apply targeted ESG approaches, such as positive screening based on a variety of ESG or impact criteria.
Exclusion or negative criteria serve as gatekeepers for sustainably oriented portfolios: on their basis, investments in companies or countries are excluded if they do not meet or violate defined criteria. At the company level, these criteria typically relate to business activities such as the production of controversial products, or business practices such as the violation of human rights. The definition of specific revenue thresholds or the inclusion of further parts of the value chain (e.g. suppliers) allows for the fine-tuning of the exclusion criteria. Criteria for the exclusion of certain business practices are often based on internationally recognized norms, such as the principles of the UN Global Compact or the standards of the International Labor Organization (ILO).
In the context of government bonds, exclusion criteria typically relate to restrictions on fundamental freedoms, high levels of corruption, or not being part of internationally established environmental agreements.
At Berenberg Wealth and Asset Management, we apply exclusion criteria across our product range. Certain activities such as the production of controversial weapons are fully excluded from our investments. For other activities, a revenue threshold is applied (such as 5% revenue in conventional weapons production) to ensure the applicability of the criteria and to give companies below this threshold the opportunity to scale back activities in these areas.
For more information, please refer to our ESG exclusion criteria.
Our portfolio management uses internal and external research to conduct ESG analyses of investment positions. Using a comprehensive template, information from all sub-areas - i.e. environmental, social and governance - is analyzed. In addition, potentially existing ESG controversies are reviewed. In our ESG analyses, we focus on the material ESG factors and include, for example, company size, production locations and sector-specific aspects. All information is entered into our internally used research platform.
The focus of an ESG analysis may differ by company or sector: for example, environmental issues are more relevant in the operations of a chemical company than in the operations of a financial company. However, corporate governance is of great importance in every investment case.
Understanding the complexity of specific investment decisions requires expertise, time and resources. Therefore, we believe ESG analysis needs to be conducted internally and by the portfolio managers making the final investment decision. When the data is unclear or information is negative, portfolio management works in close consultation with the ESG Office. Together, direct dialog is then sought with the company. In the event of new information, the ESG analyses are updated.
In addition to fundamental analysis, ESG analysis helps our portfolio management to adequately assess the opportunities and risks of an investment. If critical aspects arise in the ESG analysis or information is missing, portfolio management, in cooperation with the ESG Office, enters into a direct exchange with the company to clarify the points. In particular, controversial developments that are not satisfactorily clarified may result in a company being sold or not invested in the first place.
We monitor ESG risks relating to controversial business activities and practices throughout the entire holding period of an investment. We consider ESG factors as criteria for buying and selling companies and issuers using external ESG data and internal research. Regular interaction with the issuers’ management teams plays a crucial role in gaining a good understanding of relevant ESG issues and emerging risks. In addition, companies involved in ESG controversies are identified based on the ESG controversy analysis of our external ESG data provider. A flagging system is used for this purpose: In case of serious ESG controversies ("orange flag") within our ESG INTEGRATED, TARGETED and IMPACT FOCUSED strategies, the portfolio management enters into a direct engagement with the company. This occurs both in the case of existing holdings and in the case of potential new investments. We consistently exclude companies associated with particularly serious ESG controversies ("red flag") from an investment.
ESG ratings from external data providers are an important input factor into a comprehensive ESG analysis. They provide helpful information by highlighting potential strengths and weaknesses of companies and other issuers. In addition, through well-prepared data, they help make subsequent analysis more efficient and, through their rating process, also encourage rated companies and issuers to provide greater insight into previously less transparent areas.
We believe that despite ongoing development, the standardized frameworks used by rating providers still struggle to account for the complexity and nuances of a real company. For smaller companies in particular, over-reliance on such rigid frameworks can easily lead to overlooking significant risks or missing attractive opportunities. While the overall ESG data picture has improved in recent years, there are still wide variations in the data availability of individual companies, often depending on a company's size. We have written a study on the ESG data gap for smaller companies and the resulting negative consequences in external ESG ratings
External ESG analysis and ratings must therefore complement, but cannot replace, in-depth internal ESG analysis and direct interaction with companies and issuers by our portfolio management. The combination of these aspects, carried out in close cooperation with our ESG Office, enables our portfolio management to gain a deep understanding of ESG risks and opportunities.
At Berenberg Wealth and Asset Management, the independent ESG Office and the ESG Committee are responsible for the development, implementation and monitoring of our ESG strategy.
The ESG Office is responsible for our ESG strategy and integration, verifies compliance with the set standards and is responsible for internal knowledge building regarding ESG topics.
The ESG Committee forms the ESG governance and oversight body within Berenberg Wealth and Asset Management, meets at least quarterly and is composed of Wealth and Asset Management members and executives. The committee reviews the progress of our ESG activities and discusses their further development, taking into account current trends as well as regulatory changes in the market. Key tasks of the ESG Committee include the revision and final approval of ESG policies, the review of our active ownership activities, as well as the monitoring and discussion of external developments and resulting development opportunities.
By "Active ownership" we refer to actively exchanging views with companies and issuers through engagements as well as communicating our views by providing proxy voting recommendations at general meetings.
The engagement enables us to gain deep insights into the behaviour, strategies and processes of companies and issuers. We can initiate relevant improvements and increase transparency. In this way, as an active investor, we can help improve the sustainability profile of companies in the long term and reduce risks. Therefore, the engagement process and its results are central elements of our investment decisions and the basis of a long-term, successful investment in companies.
We see the exercise of voting rights as an important tool for positively influencing companies with regard to corporate governance structures and, at the same time, for strengthening shareholder rights. We want to encourage companies to operate sustainably in the long term. To this end, we make recommendations for agenda items of general meetings based on our Berenberg WAM Proxy Voting Policy in coordination between portfolio management and ESG Office. The scope of this approach covers a large portion of the equity investments in our mutual funds. Since the voting rights for these holdings are legally held by our capital management company (KVG) Universal Investment, we pass on our recommendations to our KVG, which takes them into account in its voting.
Investments with a focus on positive impact are becoming increasingly popular. In addition to a financial return, these investments aim to have a positive social and/or environmental impact. There is no single, clear-cut definition of the term “Impact Investing”, and it now includes various forms of investment. In the past, the term mostly referred to investments in specific social and/or environmental projects or social enterprises with limited access to capital. In the meantime, the term also refers to public market investments with a focus on positive impact or the Sustainable Development Goals. What most impact investments have in common, however, is that a defined positive impact is to be achieved and certain metrics should help to determine the extent and development of this impact.
We offer funds and strategies that meet these criteria. We focus on investments that offer solutions to four global challenges. These are based on a selection of investable SDGs. Read the impact reports of our two impact-focused funds Sustainable World Equities and Sustainble Euro Bonds here.
Impact measurement is a complex field that a wide range of stakeholders from academia, business, and non-profit organizations are grappling with. There are many different approaches to impact measurement and questions remain unanswered.
Nevertheless, certain standards have been established in recent years that define a basic system for impact measurement in various areas, including the public capital market. These are aimed at intentionality, measurability and targeted management according to the impact goal.
For our impact-focused funds and strategies, we use a proprietary Net Impact Model in addition to all other implemented ESG tools. Specific impact indicators are analysed on the basis of quantitative and qualitative data and assigned a score using clear evaluation frameworks. The scores are added up at issuer level and finally aggregated at portfolio level.
The United Nations’ 17 Sustainable Development Goals (SDGs) form an ambitious global roadmap of social, environmental and economic aspects. They are to be implemented by 2030. At the same time, they also serve as a framework for governments as well as for civil society, businesses and science. The SDGs are also increasingly being discussed among investors.
Part of our impact analysis for our impact-focused funds and strategies involves mapping portfolio holdings in terms of their contribution to the relevant SDGs. Here, we focus on 10 SDGs that we consider investable based on our studies. According to its contribution, each investment is assigned to up to three of the SDGs. We publish this information in our monthly updated factsheets of the impact-focused funds.
While the mapping of portfolio holdings to the SDGs provides insight into the portfolio’s contribution regarding some of the SDGs, it is not capturing the actual impact of an investment - positive or negative. To get a full picture of the impact, a comprehensive impact analysis is required. For this reason, we additionally apply our own Berenberg Net Impact Model. See more information in the impact reports of our two impact-focused funds Sustainable World Equities and Sustainable Euro Bonds.
External sustainability labels for funds are of great importance to us, especially since we do not consider a classification as an Article 8 or 9 product within the EU Sustainable Finance Disclosure Regulation (SFDR) to be an external certification on its own. Currently, only recognized sustainability labels can provide a strong statement about the quality of ESG integration within funds and are able to confirm it. In this context, we particularly value those labels and ratings that focus on the underlying ESG investment process and do not exclusively assess portfolio holdings - labels that, thus, answer the question whether the implemented ESG approach systematically allows the selection of a sustainable portfolio.
In German-speaking countries, the label of Forum Nachhaltige Geldanlagen (FNG) offers such an assessment for funds. In 2020, we had our first fund, the Berenberg Sustainable World Equities, assessed under the FNG label. In 2021, we have already included eight funds in the external assessment. Two of our funds were awarded three out of three possible stars, while the six other funds were each awarded two out of three possible stars.