One of Australia’s largest wealth management firms is calling for the nation’s investors to develop and adopt a stewardship code to embed ESG principles into mainstream investment decisions.

The call to action comes from Colonial First State Global Asset Management (CFSGAM), amid the key findings within its recently released 10th Responsible Investment and Stewardship Report.

A decade of research has proven conclusively that incorporating environmental, social and governance (ESG) principles into investment decisions contributes to improved financial performance, making the case for Australia to establish a stewardship code – joining most developed countries around the globe – stronger than ever, CFSGAM’s head of responsible investment, Asia-Pacific, Pablo Berrutti says.

CFSGAM, known outside of Australia as First State Investments, is the $219.4 billion wealth-management arm of Commonwealth Bank of Australia. The group manages money on behalf of institutional clients, including running roughly one-third of the assets under management by CBA’s own superannuation business Colonial First State.

An important part of stewardship is recognising that listed securities represent real underlying assets, Berrutti says.

“Instead of merely treating companies as tickers on a screen, stewardship is about recognising that the companies we invest in have real economic, social and environmental impacts, and that as providers of financial capital, we need to be responsible owners.”

Growing support for ESG

Included within CFSGAM’s latest ESG research are revelations that an increased understanding of ESG issues by its investment professionals – 80 per cent of whom believe ESG principles add value – has contributed to 75 per cent of its funds outperforming their respective benchmarks across all asset classes.

In contrast with years past, this year’s CFSGAM stewardship report flipped the investment performance review away from narrow backward-looking performance numbers to get a better understanding of the major issues driving outcomes for clients.

It’s only by taking a more holistic and forward-looking view that CSFGAM, and the industry at large, can expect to improve a major gender imbalance amongst its staff, Berrutti explains. While women represent only 22 per cent of investment management roles, they comprise 51 per cent of key client-facing professionals.

Equally noteworthy within this year’s report is further evidence that ESG principles extend well beyond equity investors.

“Our fixed income team has demonstrated a clear link between internal ratings on how well we’re integrating ESG, internal credit ratings, and default experience,” Berrutti says. “The higher the risk, the lower the internal credit rating is likely to be.”

This work has influenced CFSGAM’s own ratings, issued by the United Nations-backed Principles for Responsible Investment (PRI), where the firm received an upgrade in three of eight categories, with five of the eight already at the highest rating.

Throw off constraints

Another first within CFSGAM’s latest Responsible Investment and Stewardship report was a measure of carbon intensity. Results showed that CFSGAM’s listed infrastructure, property and resources teams invest in companies that are 27 per cent, 47 per cent and 70 per cent, respectively, more carbon efficient than the average companies in those sectors.

These results are in line with the Australian Prudential Regulation Authority’s recent warnings that climate change could pose a material financial risk. Berrutti adds that directors should also be reminded of their fiduciary duties to take climate change considerations seriously, or risk exposing themselves to potential legal challenge.

Given that it’s an issue for the whole industry, he urges directors, chief investment officers and trustee boards to have good governance and strategies for understanding and mitigating climate change risk.

Berrutti blames structural issues that haven’t allowed ESG principles to flourish for the fact that much of the industry has yet to recognise climate change as a meaningful issue.

“Managers should focus more on long-term asset stewardship than on narrow short-term outcomes like benchmarking relative returns and tracking error,” Berrutti says.

He argues that it is also high time mandates were redesigned to remove constraints that haven’t made it easy to address ESG issues.

“The disconnect between long-term asset owners and short-term investment mandates needs to be removed, and greater clarity [must be] provided by asset owners on their ESG expectations,” he argues. “For example, how traditional fossil fuel reserves [are] valued needs to go beyond traditional financial risk measures, and be captured within an ESG lens.”

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