Superannuation funds are increasingly integrating ESG considerations into their investment decisions and demanding better corporate governance from ASX-listed companies.

The 2017 Conexus Financial Equities Summit heard how local super funds are applying more pressure to Australian public companies to get them to tackle environmental, social and governance issues, and agitating for better corporate culture.

Most active investors are now integrating ESG considerations into investment decisions and using their registry influence to drive better governance, Australian Council of Superannuation Investors (ACSI) chief executive Louise Davidson said.

This year, Davidson said, the influence of ESG has grown in line with the focus on climate change, chief executive pay and corporate culture, particularly the public’s loss of confidence in the nation’s big four banks, which became a target for stronger regulation.

“I’ve been involved in ESG for about 10 years and this is the first 12 months where I have felt this is moving into the mainstream and is part of everyone’s investment process,” she said. “You need social licence to operate and one sector that’s lost its social licence is banking. The fact that government has been able to regulate strongly against that sector with a tax – it’s the first piece of legislation with everybody cheering – shows banks have done something to undermine society’s confidence in their operations.”

Activism not divestment

Shareholder activism is on the rise among both institutional asset owners and managers.

Bank of America Merrill Lynch Australian research head Sameer Chopra said “there’s a lot of alpha to be had” with companies that have good governance and a majority of independent directors, which translates into higher price-to-earnings valuations, payout ratios and net profits; however, simply selling out of companies with a poor ESG ranking is not a smart option for active investors, who must engage with companies if they want ESG standards to improve, Chopra said.

AustralianSuper ESG manager Kelly Christodoulou described how the $130 billion fund had developed an ESG “key value driver framework” with its internal equities team to remove the “noise” of wider environmental, social or governance issues that do not relate to specific companies.

The fund now uses this framework as a basis for engagement with company directors and as a due diligence tool to sit alongside financial considerations on investments.

“The equities team will look at the financial metrics and we’ll look at ESG metrics and it delivers them a bigger picture and also it’s more specific,” Christodoulou said. “We have significant ownership in 25 companies now. Once you start popping up on the registry, they start calling you. Also, with smaller-cap companies, we can be 10 per cent shareholders…It’s all about having a long-term relationship with those companies. You can really work with them.”

Davidson said ACSI collaborates with peer organisations, such as the Asian Corporate Governance Association, to enhance its own due diligence on international investments, rather than relying on passive MSCI data.

ACSI would like to see better company reporting on ESG issues in Australia and more frequent disclosure to shareholders, she said.

Looking ahead to the next three to five years, Merrill Lynch’s Chopra predicted shareholder activism around ESG issues to increase, and called for mandatory share ownership for chief executives, so that management decisions become more aligned with shareholder interests.

Conexus Financial is the publisher of Investment Magazine, top1000funds, and Professional Planner. For details on upcoming events visit conexusfinancial.com.au/events.

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