The year 2020 has been a turning point for sustainable investing on so many levels. COVID has brought to the forefront of investors’ minds considerations such as how companies treat their staff, as well as numerous other environmental, social and governance (ESG) issues. But it’s not only COVID that has given sustainable investing more prominence.
Rio Tinto’s destruction of Juukan Gorge caves in Western Australia’s Pilbara region in May clearly showed how the community, including the investment community, perceives these sorts of actions as utterly unacceptable.
Moreover, last summer’s bushfires and more recently California’s wildfires put more than a pall over the atmosphere. If it wasn’t already, they established climate change squarely as a mainstream issue.
These issues and more made the session on sustainable investing at research house Morningstar’s recent virtual investment conference truly riveting viewing, with many insights for self-managed super fund (SMSF) investors.
There are now more than 3,000 signatories, representing institutional investors across every asset class, with US$100 trillion in funds under management, to the UN’s Principles for Responsible Investment. These investors understand incorporating ESG as part of the investment process better enables them to identify companies that can generate sustainable returns. Their decisions about where to apply the huge amount of capital at their disposal in turn affects the performance of the SMSFs that invest in these funds.
Rio Tinto: Case in point
One of the most fascinating parts of the session was Ausbil Investment Management’s head of ESG research Måns Carlsson-Sweeny’s explanation of how the business approached its holding in Rio Tinto after the Juukan Gorge incident.
Carlsson-Sweeny said although Rio had had a number of ESG issues in the past, its performance in this area had improved in recent years, especially around its climate change disclosure. Until Juukan Gorge, the global resources giant also had other attributes that made it an attractive investment.
“The commodities it sells, aluminium, copper and iron ore, are likely to fare well in a decarbonised world and it had also divested all its thermal coal assets. Last year the company was also fatality free for the first time in its corporate history, so it was improving,” he explained.
To give the audience insight into how it makes decisions in relation to ESG matters, he explained how Ausbil engaged four times with Rio subsequent to Juukan Gorge’s destruction, meeting with the chairperson, CEO, investor relations officer and an independent director, to discuss topics such as remedy plans and consequence management. This led to Ausbil twice lowering its ESG score for Rio and reducing its holding in the stock, before exiting its position completely. It’s worth noting Rio’s share price reached a low of $81.30 in May, before recovering to trade at around $96.64 at the moment.
That’s not to say Ausbil is out of the stock forever. Carlsson-Sweeny said the research team continues to monitor the situation, noting Rio’s recent management and system changes. But it would need to be satisfied something like Juukan Gorge could never happen again. The business would also need to prove it had strong relationships with traditional owners. “It’s vital for companies to have a social licence to operate. But it’s also important to take an holistic view and assess positives and negatives. Their commodities should do well in a decarbonising world,” he said.
Sustainability stats and facts
Morningstar’s research report Sustainable Investing Landscape for Australian Fund Investors, published to coincide with its conference, shows how investors continue to flock to investments that consider ESG factors.
According to its figures, there’s now $19.9 billion invested in sustainable investments owned by Australian retail investors, a rise of 21 per cent over the past year. This is a drop in the ocean of the $2.9 trillion invested in the local superannuation sector, according to figures published by the Association of Superannuation Funds of Australia (ASFA), but the growth rate is impressive.
Investment funds that incorporate ESG have also outperformed the broader market during the pandemic. Morningstar’s research found 70 per cent of investment funds with sustainability strategies outperformed over the first half of the year.
Investment houses are also increasingly catering to heightened demand from investors for investment products with a sustainability bias. So far this year, ten new sustainable funds have opened, with 108 funds in this sector now available to retail investors. Another panellist, Michael Jantzi, CEO of independent ESG research house Sustainalytics, says the sector will continue to grow. “Companies are more deeply integrating sustainability into their business models and can access capital, especially in debt markets, at a more favourable cost of capital if they have embedded sustainability into their business model. It’s moved from nice to have to need to have.”
Another panellist, California-based Bonnie Wongtrakool, global head of ESG investments and portfolio manager at Western Asset Management, told the audience COVID has been an accelerator for sustainability.
“It’s turbo charged ESG and made sustainability personal. Certain companies have been able to adapt their business model to a global health crisis. That’s been very inspiring to some people. They have decided to compare businesses and shop at some places and not others. These are things that were ignored before COVID,” said Wongtrakool.
“Income and equality have been brought to the forefront. For instance, some workers have been able to work from home and access health care and others haven’t. This period has also called into question the shareholder primacy model and how company profits should be divided. The fact companies that were able to pivot during the dark part of the market this year have performed better has also helped to accelerate the issue,” she added.
The message for SMSF investors is ESG and sustainable investing must be on their radar. It’s important to understand how different funds screen investments for sustainability purposes. For instance, it’s an idea to get a feel for the ESG factors fund managers consider – some funds will only screen out tobacco and harmful weapons, while others will take a broader view and also exclude investments with exposure to alcohol and thermal coal.
What’s important is to form a view of the issues that matter to you, which assets you are comfortable being exposed to and which assets you don’t want your retirements savings contributing to. Like Ausbil, you may want to more actively manage your investments for their sustainability credentials and develop systems to give you an appreciation about how a company’s approach to ESG changes over time.
It’s still early days in Australia for companies and investors when it comes to sustainable investing. The idea for SMSF investors is to take an active interest and educate yourself about the area to help form your investment views and hopefully use these views to select investments with ESG credentials that can help build your wealth over time.