News from the coal face

 – The change that we’ve wanted to see!

I like to get my news from financial institutions, their fund managers and analysts. It’s not because I don’t believe the journalists do a terrific job; it’s because the motivation behind an investor report is transparent and right from the coal face. No editors or executives trying to engage an audience on an emotional level through sensationalism, semantics and unsupported assertions. Just well-researched concepts and portfolio managers providing their insight, explaining “this is what we know… and this is what we are doing to protect and improve our investor’s financial position because of it.”

This year they have had a lot to consider. Each investor presentation highlighted a differing issue, from geopolitical concerns like the US Presidential election and Brexit to the economic effects of the COVID19 pandemic and subsequent vaccine development and distribution. There has been much to digest

Over the past decade, however, the one constant issue that investment manages have continued to address has been the accelerating effects of climate change. This has occurred in the midst of what has been an elementary debate on its existence between inept politicians, their parties and the media. This debate has recently and eloquently surmised by former prime minister Malcolm Turnbull on Q&A, and it is worth a look.

But while this debate has gone on in the public eye, the business community has continued to take action with increasingly bolder steps.

The systems, existing laws, culture, and the competitive environment have worked together and evolved to move in a direction that makes public discourse irrelevant. Michael Brissenden of FOUR CORNERS provided an insight in 2018 as to what steps businesses were taking in an economy without a definitive federal climate action policy in a report called “Weather Alert“. In light of the 2020’s bush fires in Australia, It’s well worth revisiting.

On the back of this report and with some interesting conversations about ethical investing with clients, I made my companies position clear on what we were doing to limit our carbon footprint (Be the change you want to see).

The article also touched on how funds management is incorporating Climate Change as a key consideration when deciding on which companies to invest. This criterion is encompassed in the Environmental, Social and Corporate Governance policies, are now widely adopted throughout the investment industry. These policies are largely idiosyncratic from fund to fund which is reflective of the individual mandate and areas a fund manager will focus.

Generally speaking, a prospective company will have to demonstrate to the portfolio manager that the executive team are committed to a market-leading ESG policy before they will invest. Amongst the other research carried out, portfolio managers will have a number of meetings with executives specifically about the companies ESG objectives which are generally scrutinised against the United Nations Sustainable Development Goals. Just how many meetings a manager will take specifically regarding ESG, is evidenced by the Pendal stewardship quarterly report and their update on ESG activities report.

Given our species’ level of ingenuity, the pace of economic development and modern societies preferences, a company that can commit to a progressive business strategy that incorporates sound ESG policies, is likely to have a more favourable long-term return profile.

Some businesses like Woolworths are succumbing to investor pressure to cut emissions, and others like Dr Twiggy Forrest’s’ and Fortescue Metals Group, are actively pursuing opportunities in the renewables space and taking up the challenge to make fossil fuel companies, like ESSO, redundant.

If you, like me, are concerned about the environment, this update will all come as some pretty good news. And lucky for us, it’s not the end of it.

This has been my more recent question for fund managers at these investor updates…

“… It’s one thing to invest in companies that meet your ESG criteria initially, but what happens when a company that is held holding falls short of their commitment? How does the team hold a company and its directors to account? For instance, in the case of Rio Tinto and their recent destruction of the Juukan Gorge caves, what would your team have done  if you had Rio in the portfolio?”

The responses I have received thus far have varied. Generally, the team’s response has been along the lines of one, or a combination of, the following;

  • Their analysts and managers might sit down with the board and make the funds disapproval known to the board and management.
  • They may communicate their intention to vote against remuneration resolutions at the AGM.
  • They may propose a solution that seeks to account for the error, like certain board member resignations,
  • or require a new policy be implemented that ensure a new direction that guarantees the issue is permanently resolved.

Given the size of most funds holdings in a company, this is a substantial message. This gives asset managers considerable sway with company executives and it could be viewed as a lot more beneficial than selling out of a company entirely and losing any control or influence.

One fund manager has taken a different approach.

In the case of Rio Tinto and the Juukan Cave, Ausbil noted a third ESG strike in their assessment criteria and actively sold down their position in the company down. You can read about that surprise move Here and here.

Although Ausbil is now effectively on the outside looking in, Rio Tinto knows what needs to be done to rebuild their ESG credibility with Ausbil, before they will look at moving back onto the shareholder registry. As far as Rio is concerned, a line in the sand has been drawn.

It’s refreshing to see how important ESG has become in funds management over the years. Importantly, they have done this within the existing framework of government legislation without the need for a specific climate policy. The direction companies are heading, either independently or with a guiding hand of the financial industry, will only gather pace as business leaders emphasise the importance and consumers gravitate toward them.

Ausbils’ decision to actively sell out of RIO, sets a new standard within the ESG framework. They have been recognised for it at the Zenith Fund Awards winning of the Responsible Investments award.

Now that a new benchmark has been set, it will be interesting to see how other fund managers react… That’s not to say at some point in the future, the government of the day doesn’t attempt to claim any success and brand it as one of their policy initiatives!

Further reading on various investment houses stewardship reports

Should ESG funds hold mining stocks…

Ausbil ESG Advocacy and Engagement Report, 2019

Goldman Sachs Asset Management Stewardship Report 2019

First Sentiers 2018 Responsible investment and stewardship report

Invesco 2019 Invesco Environmental Social and Governance Investment Stewardship Report

T.RowePrice’s Sustainable investment 2019 Report

& finally…

T.RowePrice’s ESG home page

Daniel Twentyman B.Bus.(Eco) Dip.F.S.(FP) Financial Planner – Authorised Representative