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.