Why 50 per cent of the investment industry cares about ESG

There has likely never been a time as important for companies to manage sustainability related issues than right now.

On a weekly basis there are examples of companies’ share prices diving off the back of alleged or actual mismanagement of environmental issues, regulatory issues, internal business ethics, community relations, supply chain or human resources issues.

Take financial services company IOOF for example. Allegations of misconduct, insider trading and other corrupt practices was enough to wipe 20 per cent off the share price in a single day in June.

Similarly, recent allegations that Tabcorp suffered “serious and systematic non-compliance” with anti-money laundering practices resulted in a four per cent dive in share price in June.

Communities are becoming more and more vocal in their opposition to projects that are detrimental to the environment and society particularly across coal and coal seam gas. Failure to engage effectively with communities has resulted in delayed projects and increased budgets on numerous projects across Australia.

Furthermore, where environmental requirements have been inadequately addressed in planning applications, as found by Australian courts, numerous large resources projects have been sent back to stage one of the planning process, most recently seen in Adani’s Carmichael project, but also evidenced in Rio Tinto’s Warkworth mine.

This combination of economic factors alongside environmental, social and governance factors is increasingly contributing to the success or otherwise of corporate Australia, impacting directly on share prices and subsequently returns to investors.

Largely driven by these increasingly frequent text-book examples of the financial impact of ESG issues, our 2015 Responsible Investment Benchmark Report found that a massive 50 per cent of the investment industry in Australia – worth $630 billion – is now systematically taking into account these factors every day in their investment decisions.

Currently in Australia, nine of the top 10 largest fund managers in Australia, along with about half of the top 50 superfunds, have declared their commitment to using ESG as core factors to inform their investments.

Far from a feel-good marketing add on to appease increasingly concerned consumers, this is really about deeply understanding the issues that are impacting valuations of companies and assets.

In the last year alone, there has been a growing body of evidence that those companies strongly managing ESG risks have demonstrated better operational performance and a lower cost of capital. Subsequently, investors are looking systematically at how these issues can add alpha or outperformance to their portfolios.

Alongside the evidence produced globally from groups including Harvard Business School, Oxford University, Credit Suisse and MSCI among others, our report found (again) strong performance, and in many cases outperformance, by responsible investment funds in Australia against their relevant benchmarks: Responsible Australian Equities Funds and Balanced Funds outperformed their benchmarks over one, three, five and 10 years.

Alongside this ever-stronger and growing business case, perhaps an even more significant shift has been occurring over the past two years: Australians in growing numbers are paying attention to how their savings are being invested. This is providing early evidence that the tradition of superfund member disengagement has started its terminal decline.

Superannuation funds across Australia are hearing more frequently from their members on issues that matter to them – not risk / reward profiles or asset allocation, but whether their retirement savings are investing in tobacco, fossil fuels, supporting poor labour practices in the developing world, or even playing a part in the human rights abuses occurring in offshore detention centres and many many more significant issues.

Simon O'Connor

Simon O’Connor

In the last two years, consumer demand for retail ethical investment products has doubled after a decade of fairly flat demand, reaching $32 billion at the end of 2014. Without a doubt, contributing to this is the focus of activist groups to harness their networks to engage with their banks and super funds on sensitive issues.

The money is moving, and the investment industry is watching and responding with a multitude of strategies: selectively divesting stocks, flexing ownership muscle with more proactive corporate engagement, directing investments into green assets such as green bonds or green property funds, and lowering the carbon exposure across portfolios.

The signs are strong that capital is starting to flow towards a clean smart and prosperous economy – investors are moving to take a responsible approach seriously.

Simon O’Connor is the chief executive of Responsible Investment Association Australasia

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