How institutional investors adapt amidst global ESG shifts
In today’s uncertain political and economic environment, how are professional investors positioning their portfolios with regard to ESG? Claudia Röring, Head of Product Management and member of Quoniam’s SI Committee, discusses current developments and shows how Quoniam can help investors achieve their KPIs through data-driven integration.
Key takeaways
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Quoniam’s ESG integration is based on a holistic approach that systematically incorporates sustainability data into stock selection and portfolio construction.
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Portfolios are optimised based on ESG ratings, CO₂ intensity, and client specifications, taking into account alpha, risk and transaction costs.
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New data sources enhance data quality, and close collaboration with Union Investment strengthens the impact of our engagement efforts.
After the peak of interest from EU investors on the back of SFDR, the new world order following the last US presidential election has halted the expansion of ESG. How have you seen clients react?
Around 2022, when the EU legislation was not fully clear, we saw a high volume of requests for information on ESG implementation. However, these requests started to decline in 2023 and 2024, as investors became more educated and questions around the EU regulations subsided. So even before the US regime change, investor requests for ESG implementation started to normalise. Today, most mutual funds are Art. 8 funds and many institutional investors have switched their mandates to Art. 8. The dominant approach is to manage key figures relating to climate change, such as carbon footprint or intensity. Broader issues such as the SDGs have not gained popularity.
Have we seen investors return to defence stocks after a period of exclusion?
We have not yet seen a fundamental turnaround among our investors, but we have seen isolated adjustments to exclusion criteria. Following the government’s new debt policy and plans to invest in the defence sector, stakeholders may put pressure on institutional investors to reduce exclusions in this sector. In Germany, many investors base their standards on the ESG target market concept, which no longer excludes defence stocks.
How does Quoniam approach ESG in light of changing investor needs?
We continue to align our ESG solutions with our clients’ interests and objectives. The most important question is what are the client’s and their stakeholders’ attitudes towards sustainability and what are their objectives.
Within the actual portfolio, the two main levers are exclusion and ESG integration. Quoniam has minimum exclusions that apply to all funds, with a focus on international norms and controversial business practices. Clients can then bring in their own exclusion criteria. Depending on the client’s perspective, we may suggest a reduction in exclusions in exchange for a KPI approach through smart integration.
For example, if the client’s initial intention is to achieve carbon reduction through exclusions, we often find that, using our extensive data analysis and scientific approach to analysis, we can achieve the same goal for the portfolio through the more flexible route of integration.
Why is integration a better route than exclusions?
The disadvantages of exclusions are that they reduce diversification and increase the tracking error.
Quoniam’s integrated approach starts with a holistic perspective. For us, ESG integration means that we combine different data sets and key figures not only in security selection but also in portfolio construction. When a mandate is initiated, we can adapt the data and key figures used to manage the mandate to the client’s individual specifications, the thematic focus or regulatory requirements.
As part of the actual portfolio management process, we optimise the portfolio with respect to a range of ESG metrics, such as ratings or carbon intensity, together with our forecasts for alpha, risk and transaction costs, automatically meeting tracking error constraints, for example. In this way, we can tune the portfolio to the desired sustainability profile. All guidelines and thresholds are customisable according to individual client KPIs.
Does Quoniam conduct ESG research?
We apply the same academic rigour to ESG as we do to our entire investment process. Quoniam’s research team has produced notable papers presented at conferences or published in academic journals. These include Bonds with benefits, Credit Factor Investing: Combining sustainability and outperformance and The role of forward-looking climate metrics in decarbonization portfolios. Quoniam’s research team explores new data sources as part of the data sourcing process. This ensures that clients have access to the most informative data for their portfolios.
What is the role of engagement in your process?
Engagement is the third lever in our process and takes place alongside day-to-day portfolio management. We work closely with our parent company Union Investment on engagement, focusing on companies where we not only see a need for dialogue but also expect to have an impact. We maintain a regular exchange with Union Investment ESG analysts and are actively involved in the selection of companies for dialogue and the topics on the engagement agenda.
Has Quoniam’s commitment to ESG changed in recent years?
Quoniam has been a signatory to the UN PRI since 2012 and we stand by this commitment. We believe that despite the changing political landscape in the US, where ESG issues have been ‘dropped’, many European investors will remain committed to mitigating climate change and creating a better future overall. Where many US investment firms may have retreated, we will continue to fully support value-driven investors in Europe and elsewhere in achieving their ESG goals.
