Active steps on ESG lead to real world outcomes

The asset management industry must be driven by both financial and ESG outcomes

We believe that when it comes to responsible investment, active management plays a vital role in holding companies to account. Every decision about where we allocate capital is a vote on a company’s fitness to be in business.

“In the early phases of the industry’s development globally, there was a focus on integrating ESG into the investment process. Today we’re moving towards understanding and measuring the results of that process – what outcomes are being achieved for society and the environment?” says Will Oulton, Global Head of Responsible Investment.

Globally, our actively managed equities portfolios are 23% less carbon intensive than their aggregated benchmarks, reflecting that as active investors our decisions have the opportunity to create better environmental, social and governance outcomes.

In 2020 alone, First Sentier Investors voted on 62,143 resolutions put forward by listed companies across our global investment universe.

12% of proxy votes were cast against management, and spanned environmental issues like biodiversity conservation and land use, social issues such as diversity and governance issues such as executive remuneration.

Active investors can work with companies to address ESG issues

Our global equities investment team Stewart Investors engage directly with the manufacturing industry on how they approach plastic packaging. In 2018 it held an interactive forum in Mumbai that explored solutions to the plastic waste problem, coinciding with India tightening accountabilities for producers of plastic waste nationally.

By 2020, many of its Indian consumer holdings have made real progress in recycling packaging materials. Most collect more than half of the post-consumer plastic waste they generate by weight, with a goal of collecting 100% by 2022.

Stewart Investors recently commissioned research into strategies to attract and retain women in the workforce and has shared these with companies in their investment universe to help address workplace diversity challenges.

In some of our Australian equities portfolios, we have found engagement with companies on ESG issues has significant implications at the portfolio construction level. Our Australian Equities Growth team believe a skew towards companies with diverse management teams can lead to improved decision-making and result in better financial outcomes.

“All companies are assessed under our ESG scoring system. We don’t ignore companies and opportunities simply because they don’t have the perfect board structure. We are open-minded about investing in “low scoring” companies if that company has a willingness to actively engage. Positive change will only occur through engagement,” says Dushko Bajic, Head of Australian Equities Growth.

For a company to achieve the maximum score for board diversity within their ESG scoring system, female representation on a company’s board must be between 40-70%. An upper limit is included to ensure boards hold equal representation of both genders.

The Australian Equities Growth teams’ flagship share portfolio has a 35% exposure to companies with diverse boards, contrasting with less than 22% of their potential investment universe meeting this diversity level. The team believes that greater diversity is a key contributor to their portfolio’s outperformance.

Investors can drive change through broader industry conversations

As active participants in 15 responsible investment-focused investor and industry coalitions globally, we 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, announced their aim to achieve net zero emissions by 2050.

“We are looking at which companies can deliver affordable, clean energy and we’re constantly in contact with our companies to encourage them to do better. We can also use our proxy voting rights to vote against companies that are not making active steps,” says Global Listed Infrastructure Portfolio Manager Rebecca Sherlock, who will be launching a responsible listed infrastructure strategy in 2021.

“Many listed infrastructure companies have large carbon footprints and social licenses to operate. I wouldn’t be acting as a fiduciary if I glanced over that. That is not in the best interest of our clients.”

First Sentier Investors are also 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 caught in modern slavery.⁶ One of the coalitions’ first actions was to issue an investor statement to ASX100 companies on investor expectations for modern slavery reporting.

Investors must deepen their understanding of risk

We believe responsible investment issues like climate change, diversity, modern slavery and biodiversity loss can pose risks to society as well as our investors’ capital. Investors must continually deepen their understanding of these risks and how they impact companies and industries across their investment universes. We also must continually refine approaches to gathering, analysing and acting on information related to these risks.

When it comes to modern slavery for example, the onus is not only on the companies we invest in to scrutinise supply chains. First Sentier Investors has developed risk mapping tools to help our investment teams to identify supply chain risks, enabling meaningful engagement with companies on ensuring safe and fair working conditions.

“This protects our clients’ capital. Modern slavery has serious social and economic consequences. The social consequences are obvious. Economically, if we invest in a company that profits from modern slavery there are risks to the company, ourselves and our clients in terms of legal, reputation and financial risks,” says Responsible Investment Specialist, Kate Turner.

“We need to uphold the integrity of the financial markets that we work in and ensure that we’re allocating capital in a way that contributes to a sustainable economy.”