Interest in ESG or “environment, social and corporate governance” issues has increased greatly in recent years.
It has been driven by a number of factors, including investors seeking to avoid reputational risk which has been more prominent following news events such as the Hayne royal commission, and concerns around climate change and the impact that it may have on investments in the future.
A key aspect of the philosophy behind ESG investing is that as new technologies develop and society seeks to move to a more sustainable footing, companies that are focused on ESG and sustainability outcomes will see the benefit of tailwinds and less in the way of headwinds over time. These companies will also be well positioned to take advantage of business opportunities as more and more customers seek to do business in this way and find it easier to engage and retain staff.
The evolution of ESG investing
There are a variety of funds available that focus on “ESG” investing, which is now often referred to as responsible investing or ethical investing.
Responsible Investing funds have evolved to take a number of forms. Some funds focus on “negative screening” which involves excluding from an investment universe companies involved in industries such as the production or sale of fossil fuels, alcohol, tobacco or weapons. Another evolution has been funds which seek to invest in companies that are making positive contributions – often in industries such as renewable energy, education, healthcare and the circular economy. Perennial’s Smaller Companies Sustainable Future Trust fits into this category, with a focus on investing in companies that are making a positive contribution to a sustainable future.
Listed companies and their views on ESG and sustainability issues
A key aspect of responsible investing is engaging with companies to both find out what they are currently doing from an ESG and sustainability perspective and what they are planning to improve going forward.
To learn more about what Australian and New Zealand companies have been doing from an ESG and sustainability point of view, Perennial recently conducted an anonymous survey that was sent to 250 Australian companies. We received responses from companies in a range of industries.
The insights that we gained from the survey included:
• Over 80 per cent of respondents agreed or strongly agreed with the statement that engagement with investors on ESG and sustainability issues produces positive outcomes.
• The focus of respondents on ESG and sustainability issues was driven by internal forces, with directors and employees being the key stakeholders encouraging the adoption of ESG and sustainability practices.
• Key areas of focus to improve sustainability and ESG practices in the next 12-18 months were diversity (81 per cent of respondents) and safety (59 per cent of respondents). Other focus areas included governance and greenhouse gas emissions.
• Over 90 per cent of respondents indicated that governance (94 per cent) and diversity (93 per cent) were important commercially for their business.
• 67 per cent of respondents had targets in place to reduce greenhouse gas emissions.
While we discovered some encouraging insights in response to our questions, we are mindful that those responding to the questionnaire are more likely to be engaged from an ESG and sustainability perspective than the average listed company.
Who should consider ESG investing?
Anyone interested in generating solid investment returns may wish to consider ESG investing as part of their portfolio. More specifically, we find that younger people are very engaged in discussions on the topic and we often have discussions with prospective investors who have strong views on ethics and the environment. Others are interested in diversifying their portfolio into areas which will benefit if the current evolution in sustainability and ESG issues turns into a revolution, or based on a view that if a company is doing good things in relation to ESG and sustainability, it is likely to be doing good things in other important areas of the business.
Damian Cottier is portfolio manager at Perennial Value Management.
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