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What will be the next generation of ESG funds?

By Reporter
 — 1 minute read

InvestorDaily sat down for a Q&A with Emilie O'Neill and Damian Cottier, the investment team for Perennial’s Better Future Trust, to get their thoughts on the fund and how finance is changing the conversation around climate change.

Q. What role do you think the financial services will play in creating a more sustainable future?

Emilie: What’s really important is to drive funds and capital to companies we believe are doing good things to drive the world forward. We avoid investing in a number of industries because firstly, we believe they’re in structural decline, but secondly we think they’re not going to drive strong returns going forward.

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As active investors we have a lot of power to engage with companies. That’s pushing companies to have sustainable practices above the regulatory minimum, and that’s really critical because the government isn’t making the changes we needed to be able to meet a net-zero future or to be able to uphold certain social standards.

Q. What are some of the emerging ESG themes you’re monitoring?

Emilie: We’ve been looking at cyber security as an important area that we believe is causing significant business risk to Australian companies. The government is investing more in cyber and personal data is super important, so we’re engaging on their active response to cyber security. Modern slavery is another area we’re doing a lot of work on – making sure that companies are mapping their supply chains and making sure they have appropriate remediation set up in case they do find those issues. 

Q. Everybody has an ESG fund these days. What does yours do differently?

Damian: We’re seeking to be a part of the next generation of ESG funds. The first generation of funds just had negative screens – taking a portfolio and just taking some of the bad stuff out of it. 

What we’re really focused on is taking our small and mid-cap expertise and finding interesting stocks that are making a positive contribution to a better future, often in areas such as healthcare, education, renewable energy. The small and mid-cap space is where we find the really interesting opportunities. The sorts of companies we’re looking for often have disruptive technologies and large total addressable market. 

Q. Why do so many investors approach ESG as a box-ticking exercise?

Emilie: My personal view is that it’s been hard to quantify ESG in the past. A lot of the data providers don’t talk to the companies on a yearly basis, they might not even talk to them at all – so they’re just using their disclosures to find out if they’re meeting certain hurdles. 

Historically it also might not have been a driver of returns, but now we’ve seen a number of ESG issues that have surfaced that have actually led to a decline in share prices. 

Q. The creation of the Better Future Trust predates the Black Summer bushfires, which was a catalyst for the inception of a lot of ESG offerings. What was the rationale behind its creation?

Damian: We were probably a little bit ahead of the curve, but we were quite passionate about taking our existing investment expertise and applying it to a real focus on ESG and making a positive contribution to a better future – we thought that was a really interesting approach. 

Q. What final thoughts would you leave with investors? 

Emilie: ESG is going to be an important driver of returns going forward, there’s going to be a lot more money coming into this space, and people need to start getting on top of it. One thing I always say to investors is to go in and look at the holdings of the fund and ask whether they’d expect to see that company in an ESG fund. If the answer is no then it’s probably not the right fund for you, but we’re super transparent with our holdings. What we’re trying to do is meet the ESG criteria that you’d expect.

 

What will be the next generation of ESG funds?
What will be the next generation of ESG funds?
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