Ahead of the InvestorDaily ESG Summit 2023, Tribeca Financial senior adviser Nathan Fradley said environmental, social, and governance (ESG) investments underperformed compared to a benchmark filled with gas companies that were profiting off Russia’s war in Ukraine.
He noted that investment performance is “relative”.
“I think there was an aspect of green think and overweighing into tech stocks during the COVID period,” Mr Fradley told InvestorDaily.
“Moreover, thematically, COVID drove ethical stocks in technology and healthcare to higher points but they’ve suffered the same downturns as many others in revaluations with interest rate movements.”
Mr Fradley said the beginning of 2022 tested ethical investors’ resolve because they had to forego on a market thematic like movements in gas prices due to the invasion of Ukraine.
However, he underscored that while clients could have profited off the war during this short-term blip, they must be comfortable with what they are investing in.
“They also need to understand that it may only be a short-term thing that washes out in the long run anyway,” he said.
“I think it’s really important to understand what moves the market and if that’s something the client wants to be a part of, because you can make money off bad things in short-term periods.
“But over the long term, we should expect similar levels of performance without that risk of investing in unethical areas.”
Mr Fradley’s comments preceded his masterclass session at the upcoming ESG Summit 2023 in March, where he will arm financial advisers with a tangible framework, insights, policies, and procedures, so they can navigate ESG investing and provide risk-managed ESG advice at scale to a range of clients.
When exploring investment options, asset managers must be cognisant of short-term, controversy-based issues the company may be susceptible to, Mr Fradley cautioned, such as potential environmental catastrophes or workers’ rights.
“This is how asset managers need to manage risk,” he said.
“They need to consider the management of the company and whether the company is aware of the things that could go wrong because it could have hugely detrimental impacts on capital.”
Long-term ESG risk management could focus on the transition to a greener economy and being aware that companies that are ignoring the shifts away from fossil fuel usage could be left behind.
“We’ve also seen trends around gender equality,” Mr Fradley said.
“Companies that have appointed more female executives tend to perform better over three-to-five-year time frames. The risk of not participating and the risk of capital loss are probably the big ones in the long term.”
In addition, capital preservation is an important consideration for asset managers, Mr Fradley said, as the share performance of companies with high levels of controversy is consistently worse and volatile.
“When you’re preserving capital for retirees or moving capital for younger people, considering things like the risk associated with poor environmental practices, poor social capacity, or bad governance is really important from a portfolio perspective,” he concluded.
To hear more from Nathan Fradley about how you can integrate best practice policies to simplify your integration of ESG risk factors into your overall risk management framework, come along to his masterclass session at the ESG Summit 2023.
It will be held on 23 March at Aerial UTS Function Centre, Sydney, and 29 March at Grand Hyatt Melbourne.