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Why nuance matters in ESG investing

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By Malavika Santhebennur
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5 minute read

Investors need to consider both opportunities and risks in ESG investments, gold partner of the 2023 ESG Summit, State Street Global Advisors said.

The asset manager’s head of investments in Australia, Jonathan Shead, said ahead of the ESG Summit 2023 that he believes it is best to apply environmental, social, and governance (ESG) considerations across a broad portfolio, including core holdings, rather than individual sectors.

“You might take energy companies for example. It’s not necessarily a question of saying that you don’t want to own energy companies. It’s about asking which energy companies are best positioned to deal with energy transition in the future,” Mr Shead told InvestorDaily.

“It may not be which companies in the industrial sector have the poorest governance. It’s which companies across the whole universe have particularly strong or poor governance.

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“We tend to think of this as an across-all-sector proposition, where you’re looking for the best risk management and the best return opportunities across all sectors.”

Mr Shead’s comments preceded the ESG Summit 2023, for which State Street Global Advisors (SSGA) is providing support as a gold partner.

In ESG portfolios, the asset manager forms a view about potential future risks or opportunities based on the company’s governance or behaviour, Mr Shead said.

“When we engage with companies for example, we often think about what kind of oversight they have of each ESG issue that we think is significant for that company,” he said.

“We ask what sort of board involvement or oversight they have of the risks and what could go wrong, and whether they have adjusted their strategy.”

Pointing to longer-term research, Mr Shead said it suggests that ESG as a theme is better at identifying the worst cases of poor governance or environmental outcomes and a loss of social licence to operate than they do, distinguishing between the very best.

Mr Shead mentioned that 2022 was not a strong year for ESG investments compared to broad-based indices due to a number of factors including the war in Ukraine, which has particularly dented market performance in the short term.

It has impacted energy prices as well as longer-term climate strategies, he said, while “controversial sectors” like weapons have performed well in this environment.

However, he highlighted that SSGA takes a long-term view of ESG themes, and as such, last year’s performance does not change the ESG thesis “in any way”.

When asked how ESG investing could evolve to thrive in 2023, Mr Shead noted that there have already been signs of investors considering how they could incorporate new opportunities into some aspects of their portfolio.

“For example, in relation to the climate and environment, instead of simply decarbonising portfolios, investors are moving towards understanding what a transition from fossil-based energy into renewable energy looks like,” he said.

“So, rather than simply looking at reducing the emissions intensity of a portfolio, I think investors are starting to consider how to take advantage of new opportunities.”

Alongside raising broader questions with companies about the energy transition, human rights and labour issues would continue to be significant at the beginning of 2023, given possible changes in labour market tightness, global supply chains, and how labour is sourced, Mr Shead said.

Responding to a question about how asset managers could recognise and avoid companies that engage in greenwashing — given ASIC’s crackdown on the practice — Mr Shead recommended engaging deeply with companies, speaking to management to understand what their stance, nature of oversight, and plans are, and what they have disclosed to the market.

“Clearly, no accountability or oversight from within the board, no plan, and no communication about that plan to the market suggest that you might have a case of greenwashing,” he suggested.

Commenting on SSGA’s involvement in the 2023 ESG Summit, Mr Shead said he believes that with ESG investment becoming a central issue, educating retail investors and sophisticated institutions is crucial for the health of the industry.

“And we’re very keen to be a part of that process,” he said.

“This summit will provide advisers and their partners with some diverse opinions on some of the contentious topics in ESG, and a sense of what the latest thinking of ESG is. Advisers can then be well-positioned to have meaningful conversations with clients about these issues.”

To hear more from the industry about the state of play in ESG investing, the future outlook, and tips from other advisers who have successfully made the internal shift to provide ESG advice to their clients, come along to the ESG Summit 2023.

It will be held on 23 March at Aerial UTS Function Centre, Sydney, and on 29 March at Grand Hyatt Melbourne.

Click here to book your tickets and don’t miss out! 

For more information, including agenda and speakers, click here.

Why nuance matters in ESG investing

Investors need to consider both opportunities and risks in ESG investments, gold partner of the 2023 ESG Summit, State Street Global Advisors said.

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