Australian asset owners intensify ESG strategies

Institutional asset owners and other investors in Australia are increasingly taking it upon themselves to push for better environmental, social and governance (ESG) standards in the companies they invest in.

Despite comparatively little government pressure, a growing number of them are taking the initiative, encouraged by the example set by some of the country's biggest players, according to local industry participants interviewed by AsianInvestor.

"There’s a been a big pick up in the way the super fund boards understand ESG and how to apply different approaches," Julia Leske, chief executive of Canberra-based Caer Research, part of Vigeo Eiris ESG network, said. 

A big driver over the last five years has been the public debate on fossil fuel investments, but it's not the only driver.

"There’s also been big debate, largely fuelled through a public outcry in New Zealand, but also filtering through to Australia on controversial weapons," Leske said. "So that’s really started to open up the questioning by different institutional investors around ESG processes – what does it mean, where do you draw the line?" 

In recent weeks, several super funds including Cbus, VicSuper and Hesta have brought pressure to bear on one of the Australia’s major miners, Rio Tinto, which has been accused of supporting lobby groups trying to discredit the science around climate change. The funds say they want mining and minerals firms in general (they have previously also pressured BHP Billiton) to make good on their green pledges.

Pressure is building on all sides, said Leske. "We are seeing increasing consumer pressure on the super funds. We are also seeing the UN's Principles of Responsible Investment (PRI) increasing their pressure on funds to disclose their own reporting requirements. That means, increasingly, asset owners are putting more pressure on their managers on ESG implementation."

In Australia, there are currently 35 asset owners who have signed up to the PRI, compared with just three across Asia excluding Japan. In Japan there are a further 16.

SIZE MATTERS

ESG investing activity was initially conducted in the main by just the larger super funds, but now a lot of the smaller funds are paying attention to social issues. 

Leske said human rights has been a big issue for investors in Australia over the last year -- specifically, how different types of company are integrating human rights issues and applying those principles through their operations.

Martin Goss, director of investment at global advisory firm Willis Towers Watson in Melbourne, sees ESG investing being further advanced in Australia than in many other parts of the region.

“There’s been quite a lot of work for many funds to have a general policy and think what matters to them. The initial focus was on understanding the risks within existing mandates and influencing new mandates, so in searches looking at how fund managers took that into account," Goss said.

Phase two is based on a much stronger sustainability belief generally. "That means, in practice, making either conscious allocations to things that might be beneficial or that might mitigate risks, or looking at how to control risk in the portfolio," he said.

Again, this kind of thing tends to be happening at the larger end of the funds market, because resources allocation dictates how a fund can implement ESG policy. Goss estimates that a number of funds below the $10 billion asset size would not have sufficient resources, "whereas the larger funds are saying we want this lens of all our assets".

A big issue for asset owners is to improve reporting and talking to their investment managers about how they are implementing ESG investment approaches, Leske said.

"In the past there’s been a lot of attention paid to proxy voting as part of ESG approaches by asset owners and I think we are really seeing a shift, not away from that but also to include a much broader conversation across the whole investment space," she said. "External and internal stakeholders increasingly seek to understand and debate the outcomes of responsible investment strategies, such as portfolio holdings, engagement results, and proxy voting behaviour."

Melbourne-based Michael Wyrsch, chief investment offer for industry superannuation fund Vision Super, told AsianInvestor the fund is constantly looking to keep the fund moving forward with regards to environmental and sustainable goals.

“To me ESG means long-term sustainable returns and it is integral to what we do. For many of our members the timeframe to retirement is 30 to 40 years, so we vote all our shares, we are low carbon across our portfolio and we do support diversity," he said.

In terms of the portfolio assets affected by this increased ESG activity, the Responsible Investment Association of Australasia (RIAA) said responsible investments quadrupled between 2013 and 2016, with 44% of Australia’s assets under management being invested through some form of responsible investment strategy up to that point.

Leske said the growth is genuine: "It’s not just those in the investment industry talking themselves up. We are starting to see more products coming online and money being shifted into products that have ESG solutions and are ethically themed."

In contrast with the situation in Europe, where ESG in asset management is based on a big push by the European Commission, the activity in Australia is happening in spite of the politicians. "This is entirely driven by market players in Australia," Leske said.

"It’s a bit puzzling as to why its different, but in Australia they have a culture that is not as willing to regulate and I think under the current government that view is even stronger," she added.

Climate change is a particularly interesting case study for Caer and others, where the lack of regulation has driven responsible investment as a direct response.

"People are willing to react quite decisively and loudly because of the lack of policy action," Leske said. "Everyone acknowledges it’s an important issue, but successive Australia governments have been reluctant to revisit the discussion because its viewed as a quite toxic area. So there’s no willingness to act on it."