Blog Posts — September 29, 2020

Qontigo’s Bocquet: ‘Vital for Investors to Quantify Environmental Risks’

Rodolphe Bocquet, Qontigo’s new Global Head of ESG, participated at a panel organized by Climate Action last week and entitled ‘Going beyond climate: managing environment risks,’ part of the Sustainable Investment Forum Europe 2020

Rodolphe Bocquet, Head of ESG, Qontigo.

The panel addressed the impact of environmental risk on companies’ operations and finances, and the ways in which investors and financial institutions can integrate environmental factors into their assessment of businesses.  

Rodolphe joined Qontigo this month and brings vast experience in the field of climate and sustainability impact and analysis. Within his remit, he will oversee the continuous evolution of the ESG ecosystem within STOXX indices, which includes sustainability, low-carbon and climate solutions. Below are some edited excerpts from Rodolphe’s participation as well as further comments he made to our blog.   

Rodolphe, what is environmental risk?

“Environmental risk is any disruption to the ecosystem services that support human activities. This encompasses from climate change to the salinization of water, air pollution, and biodiversity loss such as a collapse of pollinating insects. 

“In the absence of gold standards, the first step for managing environmental risk is for investors to decide on the way they want to approach these risks and to define their strategy: holistic or thematic approach, focus on risk mitigation, or identification of investment opportunities. As an index provider, our role is to adapt to any specific approach and to develop solutions, benchmarks and tools.”

How can corporate reporting of environmental variables be improved?

“Corporate reporting is key to every single issue in the investment value chain. I see three major trends in corporate reporting. First, there is a need for a stronger focus on the impact regarding the supply chain. Secondly, there is a need for more integration of ESG metrics in financial reporting. This means more reliable, standardized and binding data. Finally, there continues to be a need for standardization. On this point, the World Economic Forum just published a set of cross-industry metrics and recommended non-financial disclosures that could be integrated in the Generally Accepted Accounting Principles (GAAP). This could be a promising path to shedding light on how companies are aligned with long-term global goals.

“Some companies already disclose an environmental profit and loss statement (E P&L), which states the material climate and environmental risks it faces. It is a way to monetize the negative externalities of a company in its production as well as in its supply chain. It is very important for investors to have a quantifiable way to manage these risks. Significant research and development is still needed to develop relevant and operational metrics accounting for these very complex issues. It’s a great opportunity for collaboration within the investment community and academics, and I think that that is in the DNA of Qontigo.”  

Should investors be looking at pandemic-related risk?

“One striking feature post-Covid is that despite the tremendous economic collapse experienced, the decrease in greenhouse emissions amounts to only what we need to achieve every year until 2050 to be on track with global treaty commitments (-7.5%). That shows how huge the task is and how urgent it is to implement action. Covid-19 has brought forward a word that is resilience, and that should be taken into account. 

“Two noticeable trends have emerged: the first one is that there is a lot of focus on corporates, but there is no clear link between the micro and the macro. Covid has shown how important the impact of governments is on corporates. The second major link that Covid-19 has brought is the social dimension that needs to be integrated (such as migration risk).” 

What is the role of technology in helping manage and quantify environmental risk? 

“Technology will be key and very useful for a number of reasons. We need more data that is forward-looking rather than backward-looking; that doesn’t have a time lag; and that covers information about the supply chain. In all of this, tech can play a key role. Another reason why tech is needed is because investors need to grow their ESG coverage across regions and assets. Environmental risks are complex issues and you need to invest in R&D, and there is a limited ability to pay for this. One way to maintain some economically viable model is to fund tech-based solutions to reduce costs.” 

Where is the new frontier of ESG?

“If you look at total assets in ETFs worldwide, only 2% of that pool integrates ESG. It’s a tiny share. But if you look at inflows during the last 18 months, more than 25% have an ESG focus. This represents a huge change for the industry. That is, on the one hand, a very good thing; but on the other it brings a very big responsibility. For a long time ESG has been about explaining what we were doing, explaining what ingredients we were putting in the recipe. Now is the time to try how good the cake is. In other words, what the outcome of sustainable investing is in terms of change to society.”