Davy Horizons PLC ESG Insight Series

In conversation with DWS Global Head of Research Dr. Francesco Curto

On Wednesday, 30th March, Davy Horizons launched our inaugural PLC ESG Insight Series event.

We were delighted to be joined by Dr. Francesco Curto, Global Head of Research at DWS Group, one of Europe’s largest asset managers with assets under management (AUM) of c.€928bn across equities, fixed income, alternatives etc. Importantly, Francesco has been a very active global equity investor for the last 25 years, having previously built out the CROCI (cash return on capital invested model) at Deutsche Bank’s Global Valuation Group. Francesco is a financial returns focused investor, now challenged with incorporating non-financial or ESG criteria as key drivers of DWS’s investment portfolios.

Highlights

• Investors have moved away from just seeking maximisation of financial returns to saying they want to understand how financial returns are achieved and how sustainable the capital is? Sustainability means that you really understand the economic impact but also the societal and environmental impact.
• Non-financial reporting must have a defined standard that is trusted by everybody and independently audited, like financial reporting.
• 34.5% of DWS’s total assets under management (AUM) is already Net Zero committed. The end objective is to put 100% of the assets across regions in scope by 2050. From that topdown basis, all portfolio holdings, such as individual company shareholdings, need to be to be Net Zero aligned.
• DWS is moving away from exclusions and divestments to engagement for change. If organisations like DWS want to be a positive driver, we need to engage with companies and with the world to transition together.
•  It is critical that companies’ sustainability objectives and targets are clearly aligned with science. Disclosure starts with CDP reporting, then Science Based Targets Initiative SBTi. For DWS, Scope 1 and Scope 2 data are fundamental but, in certain industries like automobiles and energy, Scope 3 data are most important.
•  The portfolio manager needs to be able to see what a company is going to be doing, by when and how credible its pathway is. This is where the SBTi framework is very valuable.
• We need certain sectors today like cement, oil and gas, and materials. DWS uses the SBTi’s Sectoral Decarbonisation approach to work with those companies that truly realise the extent of challenge and are doing something about it. That will allow DWS to buy companies that may only be cutting emissions by 20% or 30% within their portfolios.
• Sustainable Finance Disclosure Regulation (SFDR) is very important because it is about putting some standards in the world of ESG and Sustainability, but it is still evolving. It is based on three clearly defined buckets — Article 8, 9 and and a pool of six funds. The bulk of DWS’s clients want Article 8 or sustainable funds. Currently, for these funds, they have to divest many sectors — this is not DWS’s decision, it is regulatory driven for certain sectors and industries. At the end of 2021, €200bn of assets were held by DWS in Article 8 funds.
•  If you assume that the economic life of assets invested today and returns are not going to change because of climate, then that is the wrong assumption. Companies need to start taking all these factors into consideration and begin the transition today — those companies are going to be the leaders and it is just a matter of time before the market recognises this.
• The biggest risks for companies are doing nothing, delaying or waiting. We need this journey of decarbonisation to start as soon as possible.