As the global Covid-19 pandemic shows little sign of abating in the coming weeks, asset owners and fund managers in Australia see sustainability as a core issue for their corporate engagement efforts. But many are still grappling with how best to apply environmental, social and governance (ESG) scoring.
Pressure is building on companies and individual countries to incorporate sustainable policy into their Covid recovery plans.
Kimon Kouryialas, Melbourne-based co-head of global distribution at fund manager Martin Currie, told AsianInvestor: “A key theme we are seeing from clients is a renewed focus on sustainability.”
Similarly, Danyelle Guyatt, Queensland-based ESG consultant and director of Climate Insight, said: “We are starting to get more integration between sustainability and investing metrics and guidelines.”
Sustainable development hinges on directing investment towards substantive long-term shifts in investor and corporate behaviour.
In Australia, Kouryialas said the Covid-19 crisis had emphasised for companies and their investors the link between sustainable investment practices and business resilience.
“Integrating ESG considerations into strategic planning can help identify, and potentially mitigate, a broader range of risks and opportunities facing a company," he said.
Investors are moving the issue forward by focusing on shaping a more resilient architecture for global financial systems, through initiatives such as the UN’s Principles for Responsible Investment, the Sustainability Accounting Standards Board, the UNEP Finance Initiative and the Sustainable Stock Exchanges Initiative.
In Australia, a broad finance industry lobby group, the Australian Sustainable Finance Initiative (ASFI), is also formulating policy ideas.
DATA AND RATING CONCERNS
Investors have various data sources at their disposal to help them identify the best companies, including ESG scores. But, as reported, the biggest concern about embracing ESG is the limitations of data.
ESG scores offered by index providers and specialists like Sustainalytics and SAM enable a more in-depth evaluation of companies, by incorporating more data and insight than is captured by standard financial analysis.
But while there appears to be a strong positive correlation between a company’s relative outperformance and its ESG policy, there are still doubts about the reliability of ratings.
Michael Wyrsch, chief investment officer of Melbourne-based Vision Super, told AsianInvestor that his team of nine does not place much emphasis on ESG scores.
“Metrics can be gamed; we might use them at times [Vision does use the MSCI ESG platform], but we would never rely on them," he said. "We prefer to look at what companies do and not what they say.”
Guyatt added: “One of the challenges with ESG scores is that it’s difficult to see through them and assess how they were derived. When you look at the methodologies and you’re doing a deep-dive into the research, there is a risk that it can actually be quite shallow.”
As a former investment committee member with Catholic Super, Guyatt said a lot of ESG scores tend to be reactive. “They weren’t very good predictors of companies’ performance before the event. The best [asset managers] tend to compile ratings from a few different sources to cross-check their own due diligence,” she noted.
Rio Tinto is a classic example of a company that scored quite well before it blew up a 46,000 year-old Aboriginal cave complex in a recent scandal.
POLITICAL WILL REQUIRED
Industry super funds such as Cbus, Hesta and LGS have also used ESG scores, but often as a means of having a deeper conversation about sustainability with their external fund managers.
Vision Super uses the Australian Council of Superannuation Investors, a lobby group of 39 asset owners managing some $2.2 trillion in assets. Wyrsch said his organisation also sometimes gets involved with particular companies. “We co-filed on a resolution at BHP last year and met senior members of the company on four or five occasions. That was pretty revealing.”
However, Guyatt said initiatives like ASFI would only succeed with a political will to drive it. “I’m not sure if it’s going to land on deaf ears with this current government – but that’s part of the craft that the ASFI leadership team is working on, trying to engage with Canberra as far as possible.”
Australia’s institutional investors will be watching closely to see which companies and fund managers adapt their approaches to ESG and sustainability amid the current crisis – and whether politicians will help.