We believe that 2020 was a watershed year for responsible investment – the same momentum that has fuelled the climate movement is spilling into other areas and setting higher expectations for companies globally.
Investing in global markets for nearly 30 years, we know that climate change is an investment issue that cannot be ignored. Stranded assets result in material losses for investors and we expect the shift to renewables to be among the strongest growth stories of this decade. Throughout the 2020’s, we are expecting to see several other ESG issues grow in significance alongside climate change.
A strong social sentiment has emerged from the pandemic, underlining the importance of companies’ social licence to operate. This includes institutional investors, and we know that staying true to our duty as stewards of our clients’ capital is key to earning our own social licence to operate.
As part of this approach, we are focusing on four issues that we believe require immediate action from investors: climate change, biodiversity, modern slavery and diversity.
Climate change – investing in the journey to net zero
Climate change impacts the availability of resources, the price and structure of the energy market, the vulnerability of infrastructure and the valuation of companies.
We have developed new tools to help us measure and monitor climate risk and opportunities. Globally, our actively managed equities portfolios are 23% less carbon intensive than their aggregated benchmarks1.
As a business with large listed and unlisted infrastructure capabilities, we have a real opportunity to lead change in decarbonising the world’s energy supply, and managing resources in a way that puts the communities that rely on them first. Infrastructure companies have large carbon footprints and rely on their social licenses to operate. From the world’s first battery operated ferries in Scandinavia, to investing in water re-use in Australia and some of North America’s largest solar energy producers, we are investing in assets creating this change.
Recognising the value of company engagement, we also know that investment decisions are not just made from the bottom up. In 2020, our Multi-Asset Solutions team made the decision to divest from direct fossil fuel assets in our objective-based portfolios. Their approach combines carbon risk analysis at both the sector and stock level.
We also collaborate with like-minded institutions to set higher expectations for companies seeking the support of our investors’ capital. One of these coalitions is Climate Action 100+, a group of 540 investors representing more than $52 trillion dollars globally. It aims to pressure the world’s largest corporate greenhouse gas emitters to take action on climate change.
This approach is already bearing fruit: for example, last year, Southern Company, an electric utilities company our listed infrastructure team actively engages with as part of Climate Action 100+, announced their aim to achieve net zero emissions by 2050.
Biodiversity – understanding our reliance on the ecosystems we live in
With the COVID-19 virus spilling from animals to humans, the pandemic has demonstrated the fragility of the connection between people, companies, wildlife and biodiversity. Interdependent on climate change, we believe biodiversity conservation will be pushed to the forefront of ESG conversations in the coming decade.
Projections indicate that unless emissions are rapidly reduced, up to 50% of species2 are forecast to lose most of their suitable climate conditions by 2100 under the highest greenhouse gas emissions scenario3. Analysis of around 6,800 ecological communities on six continents adds to a growing body of evidence that connects trends in human development and biodiversity loss to disease outbreaks4.
At an industry level, we are engaging on issues including deforestation in the Amazon, improving plastic packaging and the circular economy in India, and engaging with commercial and domestic washing machine manufacturers on the issue of plastic microfiber pollution.
We are engaging with companies on their environmental permit processes to ensure that vulnerable species are not impacted by the development work they are undertaking. We are also encouraging companies to adopt and report on sustainable practices. While we believe that preventative measures must be considered across every company operating in every sector, we have prioritised engagement on biodiversity protection and land use with companies in industries with a high nature dependency; forestry, agriculture, fishery and aquaculture and utilities.
Modern slavery – investing in a better quality of life for the world’s most vulnerable citizens
Behind the clothes we wear and the technology we use in everyday life, there may be victims of modern slavery. The Global Slavery Index identified laptops, computers and mobile phones imported by G20 countries as the highest risk items.
There is increasing regulatory pressure on companies operating in the developed world to consider the vulnerabilities in supply chains across the developing world. The International Labour Organization has estimated that there are over 40 million victims of modern slavery. Women and girls account for 71 per cent of modern slavery victims, while one in four victims are children5.
We are convenors of Investors Against Slavery and Trafficking APAC, a group of investors representing US$4.27 trillion assets that aims to improve the lives of an estimated 40 million people in modern slavery6. One of the coalition’s first actions was to issue an investor statement to ASX100 companies on investor expectations for modern slavery reporting.
The onus is not only on companies to scrutinise supply chains. First Sentier Investors has developed risk mapping tools to help our investors identify modern slavery risks, enabling meaningful engagement with companies on ensuring safe and fair working conditions.
Throughout the COVID-19 pandemic, we also engaged with industries experiencing surging demand and tight production timeframes. We wanted to know whether working conditions were still being audited, whether WHO social distancing guidelines were being met in factories and whether workers had access to sick leave. This led to a number of positive conversations with the companies we invest in and a deeper understanding of the risks in other companies.
Diversity – paving the way for the next generation of social norms
2020 saw the Black Lives Matter movement in the USA resonate throughout the rest of the world, with protests erupting in cities from Tokyo to Brussels to Sydney. Social equality across all aspects of life is growing in importance to communities globally.
Representation matters in business – and there is a growing social expectation that people of all races, religions, gender, sexualities, disabilities and socioeconomic backgrounds should be given equal access to employment opportunities.
We believe that a diverse workplace fosters an environment of informed decisions and stakeholder engagement. In Australia, a study found that diversity of thought boosts company performance. An increase in the share of female ‘top-tier’ managers by 10 percentage points or more led to a 6.6 per cent increase in the market value of ASX-listed companies7.
We joined the 40:40 Vision initiative in 2020, which aims to increase the proportion of women in senior leadership across Australia’s largest listed companies to at least 40% by 2030. This is in addition to our membership of the 30% Club, which advocates for boards to have 30% female representation.
At a portfolio level, many investment teams are taking a proactive approach to monitoring gender diversity, including it in their investment criteria and engaging with companies where we believe are falling short.
For example, our global equities team, Stewart Investors, recently commissioned research into strategies to attract and retain women in the workforce and shared these with companies in their investment universe to help address workplace diversity challenges. They found an IT services provider opened an all-women Business Processing Services centre in Riyadh, employing over 1,000 women, and a company in the automotive and farming sector ensures that a minimum of 30% of new hires in ‘core’ roles of engineering, research and development (R&D), sales, and manufacturing are women.
Our Australian Equities Growth team assesses diversity in Australian companies through their ESG scoring system. For a company to achieve the maximum score for board diversity, female representation on a company’s board must be between 40-70%. While less than 22% of the companies covered by the team meet this diversity criteria, the team’s flagship share portfolio has a 35% exposure to companies with diverse boards. Believing in engagement ahead of exclusion, they are open-minded about investing in “low scoring” companies if that company has a willingness to actively engage.
The decade ahead will be challenging
Each of these issues are growing in prominence and urgency for communities, businesses and investors, but progress is slow.
We know, for example, that with current growth patterns, we cannot expect to see equal representation of women and men at the CEO level until 21008.
Despite a growing commitment to tackling the challenge of climate change, the awareness and action of the investment industry on biodiversity conservation issues is lagging. We believe investors need the guidance of clear frameworks for identifying and addressing risks and opportunities for biodiversity in different industries.
1. First Sentier Investors, MSCI Data as at 31 December 2020
4. https://www.nature.com/articles/d41586-020-02341-1, August 2020
5 https://www.wgea.gov.au/newsroom/media-releases/ more-women-at-the-top-proves-better-for-business
6 International Labor Organization, 2016
7 Investors Against Slavery and Trafficking (IAST) APAC
This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (Author). The Author forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for the Author is available from First Sentier Investors on its website.
This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Any opinions expressed in this material are the opinions of the Author only and are subject to change without notice. Such opinions are not a recommendation to hold, purchase or sell a particular financial product and may not include all of the information needed to make an investment decision in relation to such a financial product.
To the extent permitted by law, no liability is accepted by MUFG, the Author nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that the Author believes to be accurate and reliable, however neither the Author, MUFG, nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.