Insight #49 ESG investing (again)

Introduction

Back in 2010 over seven years ago, Gateway wrote an article on ESG investing and commented that it was an emerging trend in the US, which was likely to gain influence in Australia in the coming years.

In the period since, ESG has hit the mainstream in Australia and it is now something that all fund managers need to address as they promote their investment product/s.

Increasing awareness and coverage of issues like climate change and specific incidents of environmental disasters around the world caused by human activity have brought ESG issues into sharper focus in the investment world, where investors have now deemed it as a critical consideration.  There is also the social and governance aspects.  What constitutes an acceptable set of ESG criteria is subjective, so fund managers need to develop appropriate screens and potential investors will need to do the research to find investment opportunities that match their own values.

A global study by State Street Global Investors released in April 2017 suggested that globally around 80% of investors have incorporated some ESG awareness into their investment strategy with this number climbing to 85% in the Asia-Pacific.

Australian fund managers and ESG

So what is the approach that Australian fund managers are taking? With the increased focus on this area for gatekeepers, the first question fund managers are likely to be asked is ’Are you a signatory to the PRI’? The PRI (Principles for Responsible Investors) is an aspirational set of principles seeking to integrate social, environmental and governance issues into investment decision making.

Some gatekeepers are also adding a Climate Change filter to the above supporting the objectives of the Paris Agreement on climate change. This means that they may raise the issue of climate change with clients to enable greater understanding of the impact of climate change on portfolios and more proactive decision making around climate change matters. 

In our experience many gatekeepers (Research Houses and Asset Consultants) have incorporated into their process researching investment managers formally to ensure ESG matters are raised and investigated. This means environmental issues and climate change are both integral factors in the ratings and advice delivered as well as social and governance issues.

What if we have not signed the PRI?

If you have elected not to be a signatory to the PRI there are other ways you can address ESG requirements.  Consideration of ESG factors promotes a well-rounded approach to investing with better return outcomes for clients. In making investment decisions, you can look at a range of ESG standards and use a range of tools and methodologies to assist with decision-making.  Commitment to ESG investing could include: 

1. Integrating ESG considerations into investment policies and procedures.  For example, in conjunction with your analysis of a company’s financials, a consideration of environmental, social and governance issues can provide a more holistic view of a company’s prospects – and ultimately better return outcomes for clients.

ESG may have legislation considerations for companies, such as workplace and environmental management. Where these considerations are overt, they can be assessed with the fundamental analysis already being undertaken. For example, when undertaking a company visit to a mining company, an analyst may see poor workplace or environmental standards, these factors are then taken into account when the analyst formally assesses the company. The analyst’s assessment may include greater financial provisions in the event of legal action, feeding into poorer profit expectations; a poor assessment on management quality; and/or, a formal note on the issue. This could result in poor financial outcomes and a poor analyst conviction, meaning the company would unlikely be included in the portfolio. 

2. Engaging with companies in which you invest, or are considering investing in, to ensure that ESG disclosure continues to be developed. This may include promoting ESG initiatives (e.g. better recycling and power management), promoting volunteer and community activities, as well as helping individuals understand ways in which they can impact ESG initiatives.

3. Developing a corporate commitment to ESG and applying this from the ground up. This includes developing a written ESG policy and regular ESG reporting that is available for all investors and potential investors.

By demonstrating the tenets above, fund managers are able to demonstrate that there is a commitment to an ESG policy and it is formally considered as part of the investment process.

Gateway’s own ESG policy ensures our business acknowledges our corporate responsibility, reduces our carbon footprint and operates as a socially responsible organisation.

About Gateway

Gateway Financial Marketing (Gateway) was established in February 2004 by Amanda Rethus and Edwina Best for the purpose of offering fund managers, other product providers and international new entrants, expert advice, services and assistance in negotiating entry into the Australian Retail Financial Services market. Use of Gateway’s services provides the opportunity for clients to overcome the hurdles that can often confront fund managers when transitioning from institutional to retail and hence improve participation in retail funds flow. Prior to Gateway, Amanda and Edwina spent over 30 years combined with major institutions in the financial services market.

Our qualifications

Amanda has over 20 years’ experience in the Financial Services industry and was formerly a Divisional Director in the Financial Services Group of Macquarie. Amanda managed investment portfolios for over 10 years, and has spent in excess of 10 years introducing investment products to the Australian Retail market.

Edwina has a Bachelor of Business from UTS majoring in Marketing and International Business. She has over 15 years’ experience in the financial services market, concentrating in relationship management, product management and marketing. They both have extensive contacts in the retail financial services market especially with key decision makers. If you would like to confidentially discuss your current approach to the Australian market or have any questions on the above please do not hesitate to contact us on – Edwina 0404 046 179 or Amanda or 0414 658 323.

Disclaimer

This information speaks only as of the date it is given and the views expressed are subject to change, due to factors such as market and industry conditions. There is no obligation to update the information in this article. The information, whether taken from public sources or elsewhere, has not been verified and we have relied upon and assumed without independent verification, the accuracy and completeness of the information.

To the extent permitted by applicable law, none of Gateway Financial Marketing Pty Ltd, its affiliates, or any officer, accepts any liability for any direct or consequential loss arising from any use of this article or its contents.