HESTA and VicSuper are aiming to make analysis of environmental, social and governance (ESG) risks part of mainstream brokerage research in
They last month launched a program, ESG Research
Australia (ESG RA), modelled on the Enhanced Analytics Initiative, a project mainly
undertaken by European pension funds to encourage ESG research. The funds will seek involvement from institutional investors, to help incentivise brokers to analyse the “intrinsic” value of companies beyond current measurements, Rob Fowler, chief investment officer of HESTA, said.
Fowler said ESG risks within companies, such as poor human capital management and governance practices, can cause or contribute to financial underperformance. “We want brokers, and funds managers, to identify risks and opportunities in advance.” Mainstream coverage of ESG risks by brokers would send a clear signal to companies that institutional investors saw these factors as an important part of stock valuation, he said.
“We want engagement services and brokerages to ask companies the hard questions to get them to do the right thing.” Citi and Goldman Sachs are the only major brokerages in
Australia conducting ESG research. “But you need five brokerages to get into it and create competitive tension,” Fowler said. The detection of ESG risks should result in managers and engagement services meeting with companies to address the problems, not in stocks being immediately excluded from portfolios, Fowler said.
Should ESG RA met its objectives, the initiative would be wound down, he said. To join the initiative, super funds need to make the following commitments: make ESG analysis a criteria for inclusion on their broker panel; pressure asset consultants to factor ESG risks into their recommendations; support an annual research award to raise the profile of ESG analysis; and measure their own progress in integrating ESG research into investment decisions.
Sydney launch of ESG RA, David Dixon, chief investment officer of
Colonial First State Global Asset Management, said factors such as human capital management, which looks at staff turnover and health and safety records, were “common sense” parts of investing. “We would like to know the market thinking on ESG, and the sell-side is the best place for that,” he said.
However integrating ESG research into the broking mainstream would require someone to pay for it. “Brokers do what the market values,
what is paid for,” Elaine Prior, director with Citi brokerage, said.
“The single biggest move to make a difference is to have ESG included in the panel review process.” This would include analysts and portfolio managers – not only “sustainability champions”. Meanwhile, the Federal Government committed $2.5 million to a Responsible