A focus on environmental, social and corporate governance (ESG) factors must be the cornerstone of long-term investment approaches, according to AustralianSuper's chief investment officer, Mark Delaney.

“The pension plans in Australia are long-term investors. We've got people's money for 40, 50, 60 years. Now, if your investment horizon is longer than five years, then ESG must be the cornerstone of the investment approach because that's really reflecting how society is evolving in the longer-term environmentally … and as a society,” Delaney said during a panel at the Milken Institute Asia Summit on Wednesday (December 9).

To do so, the $129.1 billion AustralianSuper makes efforts to ensure that the people who make capital allocation decisions integrate ESG principles into their stock selection process, he added.

Fund managers are expected to evaluate environmental risk, carbon risk and whether a company’s labour practices are sustainable in the long run, on top of ensuring that the “underlying business model is sustainable, which is not always the case", said Delaney.

Mark Delaney,
AustralianSuper

“We don't want to be investing in companies [involved in] unsustainable business activities because that won't work in the longer run,” he noted, adding that ESG was moving from being a sideline activity to becoming fully integrated into the investment process.

Delaney's declaration of the importance of ESG marks an apparent effort to express the superannuation fund's dedication to the principles. Earlier this year AustralianSuper was named by the Australian Centre for Corporate Responsibility as one of several superannuation funds to have failed to support a majority of climate-related proposals at companies in which it was invested between 2017 and 2019.  

The rise in ESG engagement is not limited to Australia or Europe. US-based Carsten Stendevad from Bridgewater Associates and Hong Kong-based Mervyn Tang from Fitch Ratings, both of whom were also speaking at the webinar, noted that countries around the world have picked up on ESG.

“You see it in Canada, you see it in Singapore. I just saw a recent RFP (request for proposal) put out by the Chinese National Social Security Fund asking for ESG-focused mandates,” Stendevad said.

GREEN FINANCE FOCUS

In the US, ESG commitment is widely divided, where some asset owners and endowments in the coastal areas are more focused on it than other regions, Stendevad said.

“It has been a bit of a bumpy road – just recently the Trump administration’s labour department put out Erisa (Employee Retirement Income Security Act of 1974) pension plan rules around here… that really reinforce the importance of Erisa fiduciaries to only focus on financial considerations," he added. 

Erisa is a federal law that sets minimum standards for most voluntarily established retirement and health plans in the private industry to provide protection for individuals in these plans.

Asia is more fragmented, Tang noted. “One thing we see is that there's more of a focus on green finance as opposed to ESG, particularly in China. There's a lot of focus on green bond guidelines in Hong Kong and Singapore.”

On the ESG front, Tang observed that stock exchanges, governments and central banks have separately introduced initiatives. For example, stock exchanges such as Hong Kong's have been introducing voluntary corporate disclosures, and central banks have been bringing in climate change as a focus. The Hong Kong Monetary Authority is just one example

“One way we have seen Asia stand out is the incentive mechanisms put in place for sustainable finance – China in particular,” Tang said. “If you see how the PBOC [People’s Bank of China] has accepted, say, green bonds as collateral, there are a lot of policy mechanisms being put in place [such as] incentive mechanisms for sustainable finance, which we have seen actually less of elsewhere.”

PRESCRIPTIVE ESG

However, greenwashing – pretending to adhere to ESG principles without seriously doing so – is still a concern, the speakers said. 

“The reality is, I think, a lot of fund managers are very conservative in how they view things and… they bring their politics to work when they look at their portfolios,” Delaney said. “But the reality is that the world changes around you, and you need to have the best portfolio for the world you are going into, not the world you’ve left.”

Carsten Stendevad
Carsten Stendevad,
Bridgewater Associates 

Stendevad highlighted the importance of authenticity but said that ESG rules should not be too prescriptive.

“There's a ton of ESG topics all over the world. They're all important, but they may not be material for your investment style," he said. "And therefore if ESG rules are too prescriptive, it can lead to kind of ‘check the box' activities that are really not helpful for anyone."

“This is not a black-and-white issue,” Stendevad added, noting that people value ESG differently. “These are all shades of grey or shades of green.”

He stressed the importance of having an analytical framework and systematic approach for investment processes to follow and having a triangulated view of what other people think, then testing their outcomes against their original goals.

Moreover, Delaney said: “ESG investing is not overly difficult. All you have to do is to evaluate what you think the future cash flows are of the investment you are buying. The fact that they are harder to be quantified doesn't make them less important.

“ESG is a classic case where qualitative factors will have a big influence on quantitative bond outcomes in the future," he added. "So getting people to be better skilled at analysing and handling non-quantitative factors in investment analyses will improve the process dramatically."