Robert Fowler, executive manager, investments and governance of industry super fund HESTA, succinctly identifies what ESG is by saying what it’s not: in Australia it’s neither ethical investing (EI), nor socially responsible investing (SRI), he says. HESTA, with 69,000 members and $15 billion in assets, was an early adopter in the ESG universe, says Fowler, while pointing to Australia’s pioneering efforts in this frontier. ESG is very different overseas, he says. “In the US, it’s about what is now termed EI. It’s driven by the churches and is about exclusion.” In Europe, the approach is SRI, looking for the best-of-breed performers in this field, and it grew out of concerns over the acid rains of the 1960s, he says. In contrast, ESG in Australia is neither EI, nor SRI. The question is: does it offer good returns? He gives the example of South Africa’s Aquarius Platinum: even though the stock is out-of-favour, when it falls to say $4 due to safety concerns, it’s actually a good buy, Fowler says.

Agnostic is a good term to describe the position of Duncan Paterson, CEO of CAER, on which process enhances investment returns the most. “All approaches are equally valid,” he says, “as long as the ultimate consumer of the financial product has sufficient information to exercise choice.” There is a myriad of methodologies being used by fund managers to integrate ESG factors into their valuation processes. Some CAER clients screen out companies that are performing poorly, some clients prioritise companies performing well. Almost all clients use engagement with investee companies to encourage improvements in company behaviour.

Other CAER clients use values-based criteria and market themselves as thematic green or ethical products, and some clients are focussed solely on the implication of ESG criteria for investment risk management and have no regard whatever to the ethical implications of a company’s activities. Fowler says the acronym ESG could also stand for “early signal guidance”, which is another way of thinking about ESG. It encompasses information and corporate behaviour of which investors should be wary. “It’s your fiduciary duty: it’s about risk, not just returns – so it must be in your assessment process,” he said. “You must do it transparently. There’s a groundswell of ESG coming through.”