"The finance sector can also contribute to a better world"

Responsible investing – this is the idea behind the concept of ESG: investors are not only guided by the financial success of a company, but will also take its performance in the areas of Environment, Social and Corporate Governance into account. A conversation with Andreas Kusche, IR Manager at Daimler, and Dr. Rupini Deepa Rajagopalan, Head of the ESG Office at the private bank Berenberg, about the importance of sustainable investment, personal commitment and the role of companies.

Dr. Rajagopalan, at just 33 years of age you not only have a doctorate under your belt, but have already held a junior professorship and now head up the ESG Office at one of the most old-established banks in the world. What motivates you?

I've always been interested in figures, even as a child. I therefore decided very early on that I wanted to make my career in the world of banking and finance. It was while I was doing my Master's in Scotland that I first encountered the concept of sustainability in a financial context. The idea that the financial sector can also contribute to a better world was something that quickly began to fascinate me and led to me subsequently deciding to focus on the subject for my doctorate at the University of Reading (England). After completing my doctorate I became a Junior Professor of Business Administration at the University of Hamburg (Germany), until leaving to return to the financial sector in 2018. And that's how I come to be working at Berenberg.

…at a private bank in Hamburg that has a long history as far as sustainability is concerned. What exactly do you do there?

I've been the head of the ESG Office here since March 2018. The letters ESG stand for Environment, Social and Corporate Governance. These non-financial criteria are used when assessing investments or business practices. ESG information is used by players in the financial markets, such as pension funds or asset managers, as a complement to their fundamental economic analysis work. The goal is to understand the risks and potential returns involved when investing in a company. A company with a long-term perspective will ultimately have an intrinsic interest in acting sustainably, since risks and costs, for example, can be reduced this way.

Mr. Kusche, you are responsible for communication with the capital markets in relation to ESG at Daimler. Has the importance of sustainability grown, for investors?

Indeed, we are definitely seeing an increase in interest around sustainability issues on the part of the capital market. The breadth and scope of such issues is vast. For the automotive industry it is above all climate protection and thus the reduction of CO2 emissions, the conservation of resources, and transparency in our supply chains that are the main topics under discussion. Always linked with questions about operational implementation. Ultimately, our aim is to work with the investors to explore what will help them in their assessment of a company's sustainability credentials. For our investors, ESG factors are growing in popularity as an instrument that can be used to assess the risk in their portfolios. The EU's "Green Deal" and "Action plan for financing sustainable growth" are clearly leading the way here.

What is the specific impact of this at Daimler?

Well, the number of ESG-related inquiries that we receive has increased noticeably over the last couple of years. The interest, from institutional investors in particular, is growing. One example of this is the letter sent earlier this year by BlackRock to the CEOs of the companies in their portfolio. BlackRock, as one of the world's largest asset management companies, views climate risks as investment risks, urges companies to play an active part in countering climate change, and will in future reflect companies' performance in this respect in its own voting behavior at their shareholders' meetings.

Dr. Rajagopalan, when you have to evaluate a company according to ESG criteria, how do you go about this?

There are various ways of integrating ESG. It all starts, I would say, with our exclusion criteria, the application of which leads us to exclude certain products, sectors and sovereign states right from the get-go. Probably the most well-known example here involves the manufacturers of landmines. It also, however, means not investing in companies that do not comply with the ten principles of the UN Global Compact on human rights, labor etc. We also interact directly with companies in relation to Environment, Social and Corporate Governance issues and use ESG scores to identify the potential impact on the performance of companies and countries. It is more and more often the case, for example, that if smaller companies are unable, for capacity reasons, to publish their data, we will work directly with the companies to conduct our own analyses. This allows us to identify those companies that are truly sustainable and also to verify the information with which we are provided.

Mr. Kusche, which specific sustainability initiatives at Daimler would you mention to a potential ESG investor?

One of the clear areas to focus on at present is our "Ambition2039" for Mercedes-Benz and Daimler Trucks. The achievement of our CO2 emission targets is the key criterion over the short term, but also over the medium and long term, in our contribution to the Paris climate goals to which we have committed ourselves. We are going to have to step up to the plate here over the next few years and underpin our ambition with action. The holistic approach of Ambition2039 in particular is going to be crucial in this respect. In terms of implementation, we are already able to provide some good examples, such as our CO2-neutral production facilities in Hambach or in Jawor.

And in the future?

…an important part will be played by battery technologies and their implications for the use of risk materials. Closely allied to this is the respect of human rights in our supply chains and the recycling of the batteries. The complexity of supply chains often comes as a surprise to investors, and instruments such as our Human Rights Respect System, can be very helpful in our communications.

So do you think that, in a few years' time, investors will only invest in our company if we can keep pace with non-governmental organizations in the areas of Environment and Social?

It's not that this is a completely new topic. Sustainability is a subject that has long been firmly embedded at Daimler. For example in terms of environmental protection, energy efficiency and the Life Cycle Assessment of our vehicles, but also of social issues such as human rights or diversity, to name just two. By making our sustainable business strategy an integral element of our overall corporate strategy we are ensuring that corporate decision-making is directly based on sustainability criteria. But of course we remain focused on achieving economic success – not least in the interests of our shareholders. It is therefore going to become more and more important to be able to provide an answer to the question as to how well we are prepared for climate change and its associated physical and transitional risks for our company and our business model. But it will also be a question of whether we recognize and seize opportunities. Extensive interaction with investors, with our stakeholders and with NGOs will also help us along this way.

Dr. Rajagopalan, what is your impression? Do your clients really ask for ESG product portfolios because they identify with this way of thinking, or because it is claimed that sustainable product portfolios do genuinely lead to higher profits?

In my view there are two types of investors. On the one hand there are investors such as churches and foundations, which have often already been applying their own moral values to their investment decisions for many years. They know exactly what they want and what they don't want. On the other hand, there is now a growing number of investors who not only want to grow their money, but also want to know which companies and products they are investing in. They want to invest sustainably and are therefore increasingly looking for ESG products or sustainable strategies. The investment is therefore not an end in itself, but the money should also achieve something. This is not to say that by investing sustainably one must give up hope of a return. I am absolutely convinced that responsible or sustainable business models, coupled with good Corporate Governance, will ensure a company's increased success over the long term. If you look at our fund portfolio you will find top-class companies that act sustainably, are very successful and, in our view, will continue to be so. They have the potential, over the long term, to beat the broad market and, in other words, to generate alpha for the investor.

Are you also committed to sustainability on a private basis?

Yes, very much so. I don't believe that a passion for ESG should end at the office door. I recently founded the Frankfurt hub for "Women in Sustainability", a professional network for women working to bring positive change for a sustainable future.

What about you, Mr. Kusche?

Whenever I am asked this I think of the words of climate researcher Anders Levermann, whom I once had the privilege of hearing speak at a sustainability conference I attended. He made a very clear argument for the fact that doing without is not a solution to our climate problem. If we want to achieve the global objective of net zero CO2 emissions in 30 years' time, we need to do more than each of us can achieve on our own. Every action we take within society is associated with CO2 emissions. But of course I also think increasingly, on a day-to-day basis, of the impact of my actions. I am very aware of this, not least when I look at my two sons. I want them to find this a planet that is still livable on, even as far ahead as 2100.

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