Katleya Gestion: support for ESG likely to suffer amid global energy crisis

Climate change is increasingly influencing investment decisions. With greater awareness of the risks climate change poses, there’s now more pressure on money managers to adjust to this new reality and to green their portfolios.

What’s more, with its billions of dollars under management, the finance industry, like other industries, has an pivotal role to play if the world is going to meet its targets to cut global emissions and hit the brakes on global warming.

But with new multiple crises on the scene, including rising commodity prices, food security, and the impact of the war in Ukraine, there is a risk that the focus on ESG will be overlooked, warns Didier Maurin, president of Geneva-based financial advisory firm Katleya Gestion.

“Taking care of nature, the environment is much easier when the GDP is very good; when a country is creating a lot of wealth.”

Maurin joined Kasmira Jefford, editor-in-chief of Geneva Solutions, to discuss the current global investment outlook, and the role of the financial sector in accelerating the transition to a low-carbon economy.

(The interview below is an edited version of the original transcript).

Kasmira Jefford, editor-in-chief, Geneva Solutions: How much can financiers do about climate change in your view?

Didier Maurin, CEO, Katleya Gestion: Of course, there is an impact with climate warming, in terms of investments.  For instance, I would quote the business of vineyards. Vintners, or the growers are obliged to choose new varieties of grapes because of the climate warming.  But it's not up to us, it is not our business, as a financier, to choose those new varieties of grapes. It's really a job for our professionals. What's important, in fact, in our job is the notion of ethics. And it's very important to respect the ESG rules and to do something for the environment; to do what's the best in any business. But of course, we're not going to take the place of all the professionals that you are choosing to develop those businesses all over the world.

But you do still have a responsibility, a top down responsibility to put pressure on, on those people making those decisions.

(02:51) I understand what you mean. I would say that we are far more here to select the professionals themselves. We're not there to do their jobs…So I would say that you are able to choose the professionals and to follow them, but not to do their business. Of course, the professionals must respect environmental or ESG rules and if they don't take care of the environment for instance, we are not going to continue to invest in companies, which would pollute everything.

So precisely – you'll choose assets that reflect those values that you have as a company, or maybe those ESG values.

(04:14) Yeah, sure, there are two considerations. Of course, we are here to make profit, okay. The companies for instance must be profitable and we are looking for capital gains. But at the same time those companies must practice a very proper job, I would say. They must respect an ethic. It is true for the environment as it is true for the labour market. For instance, we are not going to invest in companies in the world that wouldn't respect the rules of democracy. If they're exploiting children on the other side of the Earth, we are not going to invest in those companies. So all the time we trt to match the notion of ethics with the notion of business, or with the notion of profit. Both must go together.

And do you think the two go together, especially now that we're entering a bear market – do you think it's still possible to respect, to invest responsibly, and to protect one's investments and make those returns?

(05:29) I really think so, yes. Because imagine a company, which is listed but pollutes the environment all over the world. Sooner or later, the media and politicians are going to cause trouble for this company. And after a few years, if you're an investor in this kind of company, you're going to start losing money. So now the new rules in that world are more or more in the favour of the environment, in the favour of ethics. So it's a good thing. For me, capitalism must be ethical. So that's why I was telling you that we are here to choose and follow professionals.

The world is currently experiencing an energy crisis, Does this present an opportunity now to invest in cleaner energies? In other words, does it help or hinder the sustainability transition?

(06:53) I'm convinced that there is a huge market with new kinds of energies. More and more in the future – it's already the case nowadays – but you are going to use the wind, the tides, the sun, and all these natural energies. And of course, so many companies are developing new technologies over all this, and so we'd like to invest in this kind of company. It's the same with soil remediation.  For instance, we invest in companies taking care of the soil in the fields, especially when they are polluted. And of course, you must not forget all the companies which are investing in artificial intelligence, in biotechnologies and so on. The market for the moment is already huge, but it's going to continue to skyrocket.

Let’s talk about real estate because that's one of your primary investment areas. How is the real estate sector repositioning itself towards sustainability? And are you as wealth managers, ensuring the investments you choose are responsible investments?

(08:30) I would say that just now the future, when we're talking about the property markets, it’s around the notion of smart buildings. Okay, once again you must respect the ESG rules, even for the property market. But once again, I'm not an architect or a master builder, it's up to all those professionals that you are choosing to take care of all this.

But when you choose your real estate assets to invest in or advise your clients to invest in, are you actively looking at assets that are taking in that green premium as it were?

(09:13) It's an important fact to take into account. But it's not it's not the only one, of course, what's been important for us is where this building, for instance, is located. Is the GDP of this country important enough to represent a potential of capital gain on the price of this building itself? What's going to be the level of the rents... Because we mustn't forget, at any moment, the notion of profit itself. But at the same time, in fact, it's together. If you want to get the high level of capital gains, for instance, on properties, then those properties must respect the rules. You mustn't build anything without respecting the rules of the countries themselves.

We're seeing now that green strategies – buildings with sustainability credentials – can actually drive higher occupancy, higher rents. Is the clean energy transition driving higher value in the real estate sector?

(10:52) Absolutely. We observe that especially in the Western world, I would say so that way, all those properties are respecting the environment and so many rules. At the same time, when they are well located those buildings are going to get some potential in terms of capital gains. So you know, tomorrow, if you want to sell something at an important price, then these condominiums, for instance, must be very well built, respecting all those rules, especially, all those rules about the ESG.

We've also seen this “brown discount” where buildings risk falling behind if they haven't upgraded to using better ventilation systems and insulation, and so on. Is that something you see as a risk?

(12:12) Sure. For instance, if you're buying a property in Australia and you haven't any air conditioning in the building, it's going to be a big problem to get tenants and to sell it one day with a capital gain… Now, what I would say once again, is that I'm not going to do the job of any architect or any master builder. We are going to choose the companies which are very serious, to pay, to give them some capital to build something respecting all those rules. All right, but all these, in fact, come in far more in the world of the politicians. It's up to them to decide where to protect the environment and to respect the labour market and so on. So if we build something, if you develop a company, then we want those rules to be respected.

Here in Switzerland, we've been adopting tighter regulation and disclosure rules for the financial industry. What effect has this had so far on your business?

(14:17) Generally, what you're talking about, all these are representing some new cost. Now, I would take back the example of a building: respecting all those rules is going to be a little bit more expensive. Now, it's true that when you have tenants, then the level of the rents can be much higher. So in fact, in my opinion, that's interesting for everybody….

So regulation is a good thing?

(15:27) Yes. The big problem from politicians and so many governments is that they add a little bit too much, too many things in terms of red tape. The red tape is becoming sometimes something too important in so many countries, especially in a country like France, for instance. So for me, companies must respect regulation, but this regulation must be very clever. Because the cost of the red tape for companies is very expensive. Many of them are losing a lot of money because they are obliged to hire members of staff and they're just practising some red tape…But it's an obligation if you want to practice this kind of business in this country. So once again, it's a balance, it's a question of philosophy….

The fallout from Covid, Russia’s invasion in Ukraine, and the crisis we’re seeing in the energy markets: all that has magnified the slowdown in the global economy and now we have this risk of stagflation. How do you think that will impact investors' commitment to more responsible forms of investment and ensuring a green recovery?

(17:35) I'm very, very pessimistic about the global situation we have in this world. For instance, the quantitative easing taken by governors of central banks is something very dangerous. I was writing two to four years ago that it was obvious that inflation was, of course, going to come back and we're not going to stay at this level of inflation. Inflation is probably going to continue to rise at a level of over 10 per cent a year. But after the inflation, we are going to get something far more dangerous, which are the devaluations. If you look at the Japanese yen, it lost 18 per cent of its value against the dollar and against the euro since 1 January.

… So I'm very pessimistic about what's going to happen. This is what I say all the time to my customers: you must buy assets all over the world with your money.

Coming back to the main theme of the discussion, which was talking about sustainability and climate change: in light of other current crises, where does that ESG investment as a priority?

*(22:12) *Well, in a way, I suppose it's going to be difficult to maybe to get these two things together. Because, as we were saying, ESG, for instance, is something very interesting but there is a cost for all this. So at the moment, of course the price of oil has skyrocketed. And it's a big cost just now for so many people and for so many companies. So of course, what I would say is that to take care of nature, the environment is much easier when the GDP is very good; when a country is creating a lot of wealth. Then it's rather easy to take care of the ESG. But when you have a new international crisis which represents a big problem for so many people, and for so many companies all over the world, then, of course, unfortunately, sometimes, some people are starting to forget a little bit about the environment itself. So for me those two things are very important. So ethics and profitability must go together. Because at the same time, you can't lose any money on companies on the property markets; if you're losing some money, in the end, those companies themselves are disappearing. So you must continue to make money. But of course, all this respecting ethics is of course, a very big problem when there is a new international crisis. And I see that just now and you see the when you have a look at the price of energy – sure  a lot of people are going to focus on that before ESG, unfortunately.