Skye King (left) and Fiona Mann

With ESG now in the mainstream, leading super funds are turning to their relationships with managers to ensure responsible investment considerations are integrated at all levels of decision making.

The careful appointment of managers is the key to integrating ESG considerations throughout a fund’s investment portfolio, according to Fiona Mann, head of equities and ESG at Brighter Super.

Speaking on Conexus Financial and AIA’s ‘Future of Super’ podcast in a discussion regarding ESG and responsible investment, Mann said making sure managers are best in class in seeking out responsible investment considerations is essential to integrating ESG into portfolio decision making.

“We’ve got managers who are exceptional at diversity and inclusion, we’ve got managers who are exceptional at active stewardship, [and] managers who are very good in the climate space… almost as if you’re building a portfolio of managers as well,” she said.

Engagement first, divestment as a last resort

In discussing the need for funds to balance the levers of engagement, exclusions and divestment, Skye King, head of ESG and responsible investment at NGS Super, said it was essential to work with managers who are already committed to integrating ESG within their investment process.

“We spend a lot of time at the internal due diligence phase doing what we call ESG due diligence… and it really focuses on honing in and testing that ESG integration at the investment manager level,” King said.

In this way, funds can ensure managers are focused on having a meaningful impact in the ESG space, and ultimately work with companies on the stewardship of assets in the long-term. This is essential to not only minimising value destruction but also capitalising on the opportunities presented by ESG targets said King.

“We will divest if engagement becomes futile and we don’t think that there’s any change, and there’s too much risk associated with the company, but it would be our last resort,” King said.

Mann agreed, pointing out the weakness of divestment as a long-term ESG lever, particularly where a just transition to a green economy is concerned. “In divesting… you can either sell it to somebody who doesn’t care, or you can miss the opportunity to create returns in the transition,” Mann said.

Finding focus in the ESG space

As the list of issues in the ESG space grows longer by the year, Mann and King agreed that funds need to focus on their priorities and assess ESG from a risk perspective. At Brighter Super, this means building out a Task Force on Climate-Related Financial Disclosures (TCFD) report to better understand the financial risk of climate change and allow trustees to conduct scenario analysis.

“[ESG] is not an alpha driver just on its own and you need to make the decision from an investment perspective whether you are able to live with that risk or not,” Mann said.

NGS Super is similarly focused on mitigating the risks of, and capitalising on the opportunities presented by, climate change. Not only does this mean investing in climate solutions, but also conducting extensive scenario analysis and identifying leaders necessary for the fund’s portfolio.

“We’re trying to upskill the team, and spending a lot of time interrogating climate transition plans of higher scope one, scope two companies to actually make an internal assessment… and engage on that basis,” King said.

A long game

Ultimately, funds need to be ready to take on ESG integration as a long-term journey. Engagement with companies is a slow burn and requires patience and persistence from funds and their managers.

“It can take years and multiple engagements to even get an inch of progress,” King said.

The need for funds to take a long view with ESG integration can also pose challenges in the context of APRA’s annual performance test for MySuper products. Weighing up the performance test with the short-term impact of sustainable investment decisions can be a delicate balance for funds to manage.

“As an organisation, there is an issue there between what we’re trying to do with the performance test, and the actual practical application when it comes to sustainability,” Mann said.

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