Future-Proofing Investments: ESG Insights with Sneha Yadav, Head of ESG and Responsible Investing at Astant Global Management

Sneha Yadav, Head of ESG and Responsible Investing at Astant Global Management, explores the critical role of ESG in modern portfolio management. She discusses its impact on risk mitigation, alpha generation, and long-term valuation while predicting a future where ESG is fully embedded in investment processes.

Key Words

• ESG (Environmental, Social, Governance)
• Responsible Investing
• Sustainable Finance
• Alpha Generation
• Risk Mitigation
• Stranded Assets
• Regulatory Frameworks
• Discounted Cash Flow Models (DCF)
• Long-Term Valuation
• Climate Transition Risks
• Hedge Funds
• Asset Management
• Sustainability Practices
• Future-Proofing Investments

Transcript

Hello, and welcome to another episode of Banking on Information. Today, my guest is Sneha Yadav, who is head of ESG and responsible investing at Astante Global Management. Sneha, welcome to the podcast. Thank you, Rutger. Looking forward. So at this podcast, we always start with this very important question based on the book by Simon Sinek. Start with why. So that question for you as well, Sneha, why do you do what you do? Sure. So I'm currently working at a quantum macro hedge fund, which is Aston Global Management, like you rightly said, which is based in London, where I lead the ESG investment research and the ESG criteria, which for your audience, just to explain it better, it focuses on the environment, which is E4 environment, the quality of work.

S stands for social and the governance part where we focus on the transparency of companies. G stands for government. I think there's a common misconception that it's all about the climate. It's not all about the climate. It's not all about the weather. And currently, I think there's an avalanche of European or UK regulations which are also coming to the market in the field of employment. Especially at the threshold of a fourth industrial revolution, as I might call it, in which technological development and AI have burst into the scene and where the hedge funds or asset management firms cannot be left behind. So I'd say ESG becomes a very crucial factor in modern portfolio management because it helps identify risks and also opportunities that traditional financial metrics might miss.

So, my work is rooted in the belief that integrating ESG considerations into financial models; it's not just about ethics, but also about identifying material risks and opportunities or I'd say creating opportunities for alpha generation. So, in today's investment landscape if you look at it overlooking ESG factors, it exposes investors largely to significant risks and um you know such as stranded assets, and just to give you a bit of explanation, these are assets that lose value prematurely due to regulatory changes uh like market shifts or even environmental risks. And this is also particularly true in industries like fossil fuels or where companies face the threat of stranded assets due to global transition to a cleaner energy um so I'd say like you know during my time at JP Morgan Asset Management, where I started my career uh we systematically integrated ESG factors into discounted cash flow models.

These are DCF models in admiration to evaluate these particular risks and We've seen through research that companies with very high ESG scores, they tend to benefit from a lower cost of capital, which directly enhances their valuation in the long term. And by reducing the discount rate, ESG compliant companies, they become more attractive investments. Ultimately also driving long-term value and mitigating downside risks. So, looking at this from a very holistic approach, this is also like a risk assessment measure and it helps us to protect investor capital while also generating sustainable alpha, looking at it from a hedge fund and asset management industry. So that's one reason I'd say, one of the top reasons, like you also do positive good, you do social good.

To end it or to close it, I'd say hedge funds and asset managers, also like those largely at JP Morgan, let's say, they're increasingly also recognizing that ESG is no longer optional, even hedge funds for that reason. So it's also very essential to maintaining that long-term profitability and competitiveness in the market scenario. So from a very high-level perspective, ESG isn't just about like managing risks, but it's also about future-proofing investments. And hedge funds or any asset management firm they manage, like trillion and of capital, that way so by incorporating ESG into our models which is largely also my work we are not only avoiding risks which are related to poor governance or environmental damage let's say but also driving both in sectors which are aligned with sustainability and strong ESG practices are also linked to better governance lower volatility then there's higher resilience which in turn also leads to superior risk adjustment or else say like risk adjustment returns that way and in the long term I think this approach ensures that we are building.

A more resilient financial system which wishes to be capable of like addressing future societal and environmental challenges, that's my why, behind Yeah, so you're passionate about ESG and very clearly ESG is not just about the environment. That's just one component of it. It's also about social and also about governance. So that is important to point that out and great to see that you're passionate about that. So based on the passion that you have for ESG, what use cases do you at Aston Global Management solve for your customers? But specifically, we address idiosyncratic risks. These are risks which are unique to a particular company or industry that aren't captured in the traditional financial metrics. So for instance, when I was mentioning about the GCF models, in GCF models, ESG considerations, help you to adjust the discount rate to reflect a company's resilience to material sustainability risks.

So companies with strong ESG ratings, they will often have a lower cost of capital, which will increase their overall valuation. And this is also not just theoretical, if I have to say this. If we look at research from companies like MSCI Research or Morningstar System Analytics, it has shown that companies who are in the top ESG quintile, they have significantly lower financial financing costs than their peers and this includes like both equity and debt, when looking at from an ESG rating viewpoint also. So for our clients I'd say this translates into more stable returns and also enhanced alpha. And generating alpha, which is returns above the benchmark, that's like a key objective. So any hedge fund manager would agree to that. But alpha generation at the same time, it becomes more sustainable when ESG factors are incorporated.

So research shows that, you know, all these hedge funds that so there's UNPRI and, you know. When hedge funds have signed up to it, then they tend to underperform in the short term if they do not fully embed ESG. So there's this quantitative term that we use, like T-statistic, and that's a measure of a statistically significant underperformance by a particular percentage or number. But ESG is meaningfully integrated, and when it's not just used for marketing purposes, like bringing in terms like greenwashing, for example, then hedge funds can also capture a long-term alpha by identifying investments or identifying companies which have very strong governance or environmental practices that tend to outperform their peers in the long term.

So I'd say we help our clients that way by looking beyond the traditional or usual financial numbers and our approach also considers risks like a company's environmental impact or their own governance quality. Yeah, so yeah, so if you think about that, right, like that, that you're, you're creating extra value, you're doing good while doing well, right? That I think is a great thing. It's great to see that it actually pays off to, to have a good ESG strategy. So if you think about like how that creates the value, what, what type of alphas are you seeing? And are you also seeing sort of more employee happiness working for a company that's ESG (Environment, Social, and Governance)? has a good ESG strategy but what what are sort of the the benefits that you're seeing Definitely.

So, you know, with that, I say that, you know, we can better predict companies which will perform better or well in the long run. And, you know, try to avoid those that might face future challenges. Like, you know, talking about it from a regulatory standpoint or political standpoint, there might be companies which will fail or which will face regulatory fines that way or a loss of market share. So let's say in my broader work or even back at J.P. Morgan and right now at Ascent, I would say that, you know, Helped or we help institutional investors uh make more informed decisions that way um and by integrating ESG into their strategies investment strategies here and it isn't like you know about greenwashing them because this term has been constantly in use and but it's identifying like such material risks, identifying such opportunities that way for it's for instance you know to give you an example like regulatory changes that that make

which might be related to climate policy that can also create significant transition risks for industries like a transition risk physical risk from that standpoint and industries or companies that aren't evolving quickly enough or turning viable assets into stranded assets that way. That's like one risk that we'd like to avoid. And hence ESG becomes very important because it's a huge risk of financially to investors, to companies. And, you know, basically like a risk profiling of companies if I have to say and also like sectors and allowing investors to avoid these pitfalls, like having that trust, building that trust. Yeah. Now, this is one thing that I like to do on this podcast, which is called Future Thinking. Now, obviously, no one knows what the future holds, right?

We don't have a crystal ball, but we can start; we can think about what a possible future could look like. So if you think 10 years out, where do you think the banking industry is and what does ESG play, what role does it play 10 years from now? Well, I think, looking at it from a long-term perspective, because of CSG, I think by 20'34 or like 20'24 right now. So I think ESG will be fully embedded across all investment processes, and hedge funds will likely see ESG considerations as non-negotiable in their investment process. So, talking about it from a big quantitative or qualitative viewpoint, like DCF models or discounted cash flow models, which factor in the cost of capital. These will heavily rely on ESG ratings that way to determine.

The appropriate discount rates, but also ensuring that responsible companies, that you know those who are addressing environmental and social risks, they are valued higher in capital markets, and that makes a lot of difference because the concept of stranded assets, especially in carbon-intensive sectors, and because we also talk about things like just transition, so that will become a central concern for investors by or like after 10 years or within these 10 years, I'd say it's not going to be far. And I think you know looking at it from what EU or the UK how the regulatory frameworks they will have tightened forcing companies to also just disclose not only the financial, but also their environmental and social data.

Right now, if we look at things like POTO, ABS, that way, I think companies like Volkswagen or so many other, you know, there isn't like a mandatory disclosure plan and investors struggle to get that data. So I think, you know, looking at it from a long-term perspective, the financial markets will likely operate within a framework where ESG is not just like an overlay but a core component of asset valuation, modern stuff. So yeah, so it will be instead of a nice to have maybe today, 10 years from now, you say it's going to be a must-have. It will be something that investors will look at now. If we think about that, if that possible future becomes the reality, what can what can people do today to get ready for that?

Um, I'd say you know, from a regulatory standpoint, like a lot of it also depends on how the governments or the political part of the regulatory side is addressing it, because you know, if they plan to be if companies are planning to be like the market leaders of tomorrow, then investors Were also even from an investor standpoint if they fail to integrate such risks including like physical climate risk or transition risk they could find themselves holding assets that lose value very rapidly due to evolving regulations market shifts so I think it, you know more proactiveness in disclosure related plans from a government side from a country a specific site this becomes important like a disclosure based framework I think that would help companies that would also help investors and Yeah I think also looking at it from third party ratings or ESG ratings, How this will also become more critical because we are continuously facing like ongoing climate and social challenges.

Yeah, so it is really important. It is real. There is real value in understanding ESG. You've got to get ready. Because this will be a must-have in the future. Thank you, Sneha, for being on the podcast today. This was really insightful. Thank you very much for sharing all your knowledge about ESG. It's my pleasure, Rutger. Thank you for the invite. Yeah, great to have you here. And until next week, choose to be curious.