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Progress, flexibility key to ESG impact: Australian Ethical
Environmental, social and governance investing remains a lightning rod for the investment and advice industry. Many are seeking to oversimplify what is an inherently complex part of investing, while others are overcomplicating what is essentially quite a simple consideration.
Speaking with stakeholders ahead of the upcoming ESG Retreat, hosted by The Inside Network, it became clear that ESG investment is neither art nor science. It is a combination of both. There are simply too many variables, views and ethical positions for investing to ever be straightforward.
The challenge is that most ESG approaches rely on historical data, but the biggest risks to investment returns and the economy in general are all forward-looking. Thus, they are incredibly difficult to measure.
This was something highlighted during Australian Ethical’s recent webinar, which focused on the ASX-listed fund manager’s engagement with corporates and governments in pursuit of better outcomes, not only for companies but for animals, humans and the planet.
Ethics analyst at Australian Ethical, Amanda Richman, highlighted some of the significant achievements of the group. All investors are able to “use capital allocation to drive change”, Richman explained, something that is underappreciated by many in the industry. Screening alone, however, will not be enough to achieve transformation. Fossil fuel companies still exist and will continue to exist whatever Australian Ethical or other managers decide to do.
“Every portfolio will have companies you need to engage with,” Richman continued, as it is impossible to invest only into “perfect companies” that meet stringent negative and positive screens. Examples where the group has focused their attention lie in the pursuit of climate and carbon emission goals, minimising human rights abuses and more interestingly, the lens through which varying social media platforms are viewed.
Among the most important considerations of any investor pursuing positive impact from their investments, or managing capital, is the importance of applying appropriate ‘frameworks’ to both individual industries and issues. That is, a retail company cannot be assessed in the same way as a bank, nor should it be. Having different frameworks for different sectors requires extensive experience with many, like Australian Ethical, opting to employ internal ethics specialists to guide the decision-making process.
Part of this process, Richman said, has involved the portfolio management team leveraging their investment in the finance sector, i.e., banks and insurance companies, to campaign against the “unsustainable expansion of fossil fuels” in particular.
In FY22 highlights included engagement with over 450 individual companies, both domestically and global, with pressure placed on the likes of the National Australia Bank, Westpac and QBE. The latter’s “lack of ambition,” she added, resulted in a very public shareholder resolution being lodged by Australian Ethical and subsequent meetings with the new CEO.
According to Richman, much of this engagement is focused on the idea that the market can’t achieve global emission targets without financial institutions financing the transition as they are able to influence greater volumes of capital. Engaging with larger institutions is able to magnify this influence.
The role of engagement and the unique challenges to portfolio construction when it comes to ESG are all issues that will be discussed at The Inside Network’s ESG Retreat in Hobart, held between November 14 and 17.
