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ESG investing and investor engagement

Damian Cottier
— 1 minute read

As the Illinois State Treasurer, Michael W. Frerichs, said: “The investment decisions we make today will have a profound, lasting impact on our economy, our environment, and our quality of life for generations to come.”

Damian Cottier

The Perennial Sustainable Future Trust was built on the foundation of the importance of company engagements within the mid-cap to small-cap investment universe of Australian listed companies. Perennial has successfully run a smaller companies fund for 15 years. Over this time, our portfolio managers and research analysts have found that active engagement with companies’ boards and management has helped guide successful investment and allocation decisions. The level of engagement has and continues to be key. 

There are many ESG funds currently available for investors in Australia that have little to no engagement with the companies they invest in. Investment decisions are often achieved via a quantitative screen with use of external data providers. 

Perennial believes there is an opportunity for potential positive investment returns by using the existing engagement model. However more importantly, engagement with these companies can help drive better ESG behaviours for the growing companies of Australia to provide a sustainable future. 

We conducted an inaugural survey, sent to 250 companies in order to learn more about Australian and New Zealand business from an ESG and sustainability point of view. We gathered some meaningful insights across different industries, including the following top-level points:

Governance and social dominate 

Our responses to questions regarding the most important ESG themes for Australian companies provided a telling narrative – where environmental concerns did not really factor as high as we may have assumed it would. 

Governance, diversity, safety and equality were consistently at the top of all responses. It would be fair to say that even though greenhouse gas emissions were prominent in all three sets of answers, from this sample of Australian companies, the focus is more on the social and governance components of ESG. 

This might be explained by companies remaining focused on what is the most controllable area of running their business – governance and people. It is also important to note diversity was the clear standout response to the question of future improvement in the next 12-18 months. This was supported by results highlighting focus on increasing gender diversity at both entry level employment and senior executive levels.

Engagement with investors 

We also asked to what extent do companies believe engagement with investors on sustainability and ESG issues produces more positive outcomes. 

This specific question came about for two reasons – to firstly test our sense of its importance based on the many historical discussions with companies that have sought investor information on how to manage ESG issues better. 

Secondly, to assess whether or not there was a material value in this form of engagement.

The good news is that our poll results confirm our beliefs that investor engagement on ESG issues in fact drives more positive outcomes.

We think this is worth sharing as one of the key findings of the survey. Despite our obvious interest as an active investor in pursuing this line of thinking (as well as being key to our investment decisions), the results support a core belief we have about investing in the smaller market capitalisation space. 

In other words, the survey participants agreed that investor engagement does overwhelmingly lead to more positive outcomes on sustainability and ESG issues.

At Perennial, we believe engagement is key to improving corporate behaviours and something that is very important in Perennial’s investment decision-making process. 

Damian Cottier, portfolio manager, Perennial Smaller Companies Sustainable Future Trust  

Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial. This article does not take into account your investment objectives, particular needs or financial situation.

 

ESG investing and investor engagement
Damian Cottier
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