HESTA
and VicSuper are aiming
to
make analysis of environmental,
social
and governance (ESG) risks part
of
mainstream brokerage research in

Australia.

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.

At
the

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

Investment
Academy

run by
the
Responsible Investment Association
of
Australasia (RIAA) last month.

In
late 2008, the EAI, of which
HESTA,
VicSuper and UniSuper were
members,
merged with the United
Nations
Principles of Responsible

Investment.

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