It’s the new ESG-compliance index: the more smiling-children photos there are, the more problems will lurk beneath. David Gait, of Colonial First State Global Asset Management (CFSGAM), said when assessing companies’ compliance with environmental, social and governance (ESG) benchmarks, “the greater the number of pictures of smiling children in the sustainability report, the greater the problems lurking beneath”.

Gait, who is a senior analyst in emerging markets equities, said there was “no such thing as the perfect company” regarding ESG compliance. “Stewardship comes in shades of grey. There needs to be tangible evidence of an improving trend, even if it is ‘two steps forward, one step back’.” Skye Macpherson, portfolio manager – global resources, said a company could “tick all of Colonial’s financial criteria ” but still not be included in CFSGAM’s stock picks for ESG compliance.

To qualify for inclusion in CFSGAM’s portfolio, a company had to “tick” three of five criteria:

1. cash costs of production in the lower-half of world-operating costs;

2. real earnings per share growth of more than 5 per cent over three years;

3. a net debt-to-equity ratio less than 50 per cent;

4. more than three-times interest cover; and

5. improving ratio of price:operating cashflow.

During the launch of Colonial’s third annual responsible investment report last month, Macpherson gave the example of a globally diversified mining and metals company which “met the financial criteria” but which failed the ESG “boxes”. Macpherson said the ESG failure was due to the company’s “huge sulphur dioxide emissions, its health impact on workers and local communities, and its poor corporate governance”. “Also, the company treated its minority shareholders very badly,” she added. “It met our financial metrics, but not our ESG metrics.”

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