As the inimitable Bob Dylan wrote, the times they are a-changin’. Ten years ago, active considerations of the environmental fallout from a company’s actions would have put a funds manager firmly in the treehuggers’ camp. And, even five years ago, concern about social or governance issues would have been consigned to the touchy-feely basket: nice, but hard to quantify in terms of impacts on the bottom line. But, to continue the Dylanesque metaphor, there’s a slow train comin’, and institutions and managers ignore it at their peril. Integration of environmental, social and governance (ESG) benchmarks are crucial, says Andrew Gray, head of ESG research at Goldman Sachs in Australia. Climate change is a prime example, says Gray. It’s not a “moral debate, or whether it’s real – it’s about whether policy-makers and the community believe it”.
In a fundamental sense, this is the bottom line: that ESG information must now be factored into stock picking, whether or not there is a demonstrable boost to a company’s profits and thus to fund members’ returns. At ING Investment Management (ING IM), Michael Price cites the group’s experience with Origin Energy as a clear example of ESG principles boosting the bottom line. As portfolio manager of ING IM’s sustainable Australian equities, Price oversaw a large stake in Origin Energy which, inter alia, had been accumulating coal mines in Queensland and so had, unintentionally, become a takeover target. In April 2008, Origin Energy was deemed sustainable company of the year for 2007 in awards sponsored by Insurance Australia Group, and just one month later, British Gas bid for Origin, the share price of which rose 76 per cent in the three months to the end of June 2008. It was one of the largest active positions in ING IM’s sustainable fund (around 2.5 per of the fund, or 1.5 per cent overweight), and this added around 1 per cent to the overall value-added during the quarter.
But, the slow train is still coming. Talk with those in the industry and there’s criticism that Australian institutions which have signed the UN Principles for Responsible Investment are passing them down the line to their underlying fund managers. Duncan Paterson, CEO of research house Corporate Analysis. Enhanced Responsibility (CAER), says that while asset owners are definitely accepting responsibility, “to date they have been relatively slow to actively incorporate ESG factors into investment decisions. They tend to regard this principle as applying mostly to asset managers”. CAER’s research covers about 300 different ESG indicators, ranging from environmental issues, social and human rights issues through to values-based negative screening criteria such as military involvement and gaming. The consensus in the investment industry is that ESG is becoming crucial to carrying out one’s fiduciary duty: it’s about risk, not just returns – so it must be in any assessment process. Any foray into the ESG universe meets an almost constant salvo of what ESG is not.