‘ESG integration’ is only one of many factors that characterise responsible investment, according to investment manager Australian Ethical.
Aside from environmental, social and governance (ESG) integration, a number of other factors must be considered for responsible investment to truly live up to its name, according to Australian Ethical head of ethics Stuart Palmer.
Mr Palmer outlined a number of other "dimensions" to responsible investment, including negative screening, positive screening, the influence investors had on companies and governments, and the impact of the UN's 17 sustainable development goals.
Speaking in Sydney on Tuesday, Mr Palmer said that while it was a “good thing” that funds were taking environmental and social impacts into account, he indicated that there were limitations to only considering ESG integration.
“One downside of purely ESG integration approach is that it tends to be what I call ethically passive,” Mr Palmer said.
“To explain that, if I’m adopting an ESG integration approach and I’m considering continuing or furthering investment in fossil fuels, then I’m gonna think about things like how likely it is that governments are going to take strong climate policy action.
“‘Are they going to introduce a serious price on carbon?’ And then I’m going to think about, given what I expect is going to happen there, what impact would that have on fossil fuel companies with fossil fuel projects?”
If investment funds felt governments would follow Trump’s lead and pull out of the Paris Agreement, then they would be “quite happy” to continue investing in fossil fuel projects because of a belief that the projects would be likely to remain viable, Mr Palmer said.
“So a purely ESG integration approach doesn’t actually commit a fund to investing for a better future,” he said.
“It depends, on a large part, on whether the fund manager has an optimistic or pessimistic view about that future to start off with.”
Mr Palmer also said it was in investors’ interests to consider responsible investment factors outside of ESG integration. By only considering ESG integration, investors ignored the “very real power” that they themselves could “help shape the future”.
For example, by shifting capital from fossil fuels to renewables, investors would bring down the price of renewable energy, which would then encourage investment in areas such as flexible electricity grids and energy storage, Mr Palmer said.
“They’re going to contribute to a more constructive public policy debate about energy policy that we’re currently seeing,” he said.
Chief executive of peak industry body Responsible Investment Association Australasia (RIAA) Simon O’Connor also said that fund managers needed to be clear about how ESG integration came into the decision-making process.
“There is no one approach to ESG integration,” Mr O’Connor said.
“For some, it might be a quant evaluation piece that sits in a DCF model; for others it might be that ESG informs a sort of macro philosophy as to what’s changing. For others it might actually limit the universe of stocks they invest in.
“We sit there as kind of agnostic to what that approach is, but we want the fund manager to be able to clearly articulate what it means to them.”