After a significant impact on investments in 2021, environmental, social and governance (ESG) issues are expected to remain front of mind for investors moving forward.
KPMG Futures partner in charge James Mabbott, who recently outlined the severe consequences for companies who do not prioritise ESG in the next decade, spoke to InvestorDaily about how ESG will likely play out for investors during 2022.
“I think it is going to strengthen in terms of the lens with which investors look at an organisation’s performance. It won’t be enough just to look at the financials,” he said.
“We’re already seeing this with people getting questions at AGMs around ESG-related topics, but it’s going to become more formal and more structured in terms of how it gets built into the way in which investors look at an organisation’s performance.”
Russell Investments senior portfolio manager James Harwood noted that engagement had been one of the major themes of 2021.
“Investors now expect their managers to be making the most of their voting powers, engaging with companies on ESG issues, and there’s definitely a lot more interest in how you vote,” he said.
“That is another trend that will continue, and I think investors in funds and managers just want to know more and more about what we’re doing in that space.”
A key challenge for investors will be understanding what they are getting from a particular investment or product and avoiding the influence of greenwashing, according to Mr Harwood.
“So many managers are saying that they consider ESG now in their investment process, but what does that mean?” he said.
“I’ve seen some reporting from managers that they’ll compute, if you’ve got a lower carbon footprint than the benchmark, you’ve effectively planted 300,000 trees or something like that, which I think is quite misleading, personally.”
Mr Mabbott said that companies would need to be aware of the potential consequences that their ESG plans could have.
“As organisations make these statements and then begin to publish information around what they are and are not doing, and as things become more transparent and those things get tested, then you’re putting yourself in a position where, if your actions don’t match what you say you’re doing, potentially both your investors and customers will vote with their feet and go elsewhere,” said Mr Mabbott.
Helping investors understand the influence ESG factors have on investments outside of the share market, will be another major focus over the next year.
“Trying to get really helpful stats, ESG data points, to guide investors, that’s something that we’ll really work on and I’m hoping that that can extend to other asset classes beyond equities as well,” said Mr Harwood.
“Most of the ESG data that you get is really focused on equities, but I think there’s still a way to go for other asset classes.”
Developments in the regulatory space are also expected over the next year, but Mr Mabbott noted that these are primarily occurring internationally, particularly in Europe.
“The interesting dynamic here in Australia at the moment is that a lot of the practical action and activity being taken is being driven by organisations and investors, and the regulatory framework and environment is lagging a little bit in that sense,” he said.
“It will be interesting to see how that plays out in the absence of some of the stronger, stricter regulatory frameworks that exist elsewhere, but I think we’ll continue to see investor activism on these principles.”
Mr Harwood said he believed it was important to remain invested in transition companies to bring about significant change.
“ESG, maybe a couple of years ago, started with naive exclusions, just simple exclusions. That was the way an ESG fund was, and I think you’re moving from that naive base to one of a much broader lens,” he said.
“I think there will be opportunities with climate change, and you want to be invested in those companies that are making an impact in the medium term and bringing new technologies, etc to make us a lower carbon emitting world and planet, and then ultimately, we obviously want to get to net zero.”
