In this presentation, we discuss current ESG themes, including regulatory changes and key environmental, social and governance factors that investors need to understand in 2020.
7. Agenda
6
• What is ESG integration and how has it changed over time?
• Does ESG integration pay off?
• How can ESG be integrated in practice?
• What are recent trends in ESG in 2019-20?
• Climate change and implications for investors
• The increased problem of plastic waste
• Increased investor focus on human rights and modern slavery
8. What is ESG integration?
ESG integration means different things to different people
7
• Integration of Environmental, Social and Governance (ESG) factors in investment decision making
• What does ESG integration mean to Ausbil?
• Better informed investment decisions
• Engagement with companies
9. 8
Examples of intangible drivers:
E: environmental risk management, climate change risks and opportunities…
S: staff culture and engagement, safety performance, community relationship…
G: board and management quality, code of conduct, executive remuneration…
The rationale for ESG integration
The increased importance of intangible drivers over time
Source: www.ey.com
Analysis by E&Y on the components of
S&P500 market value shows that the
majority of a company’s value comes
from intangible drivers and that the
proportion of a company’s value that
comes from intangible drivers has
increased over time.
10. 9
The rationale for ESG integration
Impact on share prices and changing societal values
• ESG events and catalysts impacting share prices: tailings dam failures, conduct issues,
underpayment of workers and more
• Societal values are changing: drives new types of demands on companies (and investors)
11. 10
ESG integration in practice
Key considerations
• Data availability is increasing: ESG reporting by companies and by ESG
research providers
• Proprietary ESG research vs externally sourced ESG research:
• Weight of ESG in an investment process and incorporation in stock analysis
• Alignment: ESG research needs to be tied to the investment philosophy.
• Ausbil’s ESG integration for Australian Equities:
• In-house ESG research team within investment team
• Proprietary ESG research to get unique insights
• Focus on earnings revisions, earnings sustainability and
management quality
• Company-specific ESG scores and ESG SWOT analyses
Ausbil’s proprietary ESG research
covers 250+ companies
12. 11
The rise of responsible investment
Growth
• Sharp increase in responsible investment funds globally:
• UN PRI (Principles for Responsible Investment): ~US$90 trillion in AUM The six principles of the PRI
• Principle 1: We will incorporate ESG
issues into investment analysis and
decision-making processes.
• Principle 2: We will be active owners and
incorporate ESG issues into our ownership
policies and practices.
• Principle 3: We will seek appropriate
disclosure on ESG issues by the entities in
which we invest.
• Principle 4: We will promote acceptance
and implementation of the Principles within
the investment industry.
• Principle 5: We will work together to
enhance our effectiveness in implementing
the Principles.
• Principle 6: We will each report on our
activities and progress towards
implementing the Principles.
Source: www.unpri.org
13. 12
The rise of responsible investment
Evolution
• Responsible investment has evolved over time
• From values-based to integration of ESG to drive better investment decisions:
• Studies on returns:
• Material vs Immaterial (Khan, Serafeim, & Yoon, 2016; Katsantonis, Pinner, & Serafeim,
2016).
• Informative in risk combined with volatility reduction (Dunn, Fitzgibbons and Pomorski
(2018)
• Shift away from ‘divestment’ to ‘hold-and-engage’ strategies
• Increased focus on ESG momentum
Ethical investments
Integration of environmental, social
and governance (ESG)
14. 13
Increased focus on ESG outcomes
The UN SDGs and engagements on ESG
• The UN Sustainable Development Goals (SDGs)
• 17 high-level sustainability goals for 2030
• 244 SDG indicators
Source: www.un.org
15. 14
Climate change
Where is the world at?
• Background
• 2019 was a record year on global temperatures
• Paris Agreement aims to keep global average temperatures < 2 °C above pre-industrial levels
• 2 degrees seen as breaking point for eco systems
• Nationally Determined Contributions (NDCs) – insufficient to meet the target
Source: BAML
16. 15
Climate change
Where is the world at?
• Climate change flagged as major economic issue by the World Economic Forum
• Economic impacts:
• Physical climate change
• Transition (regulatory and technological changes)
• Different policy options
• Company responses:
• Companies moving ahead of regulators
• E.g. Shell and BHP
• Scope 1, 2 and 3 emissions targets
Source: www.epa.gov
17. 16
Climate change
Implications for investors
• Carbon footprint analysis (‘carbon footprinting’)
• Level of carbon intensity of investment portfolio vs benchmark
• However, challenges with this:
• Assumptions of pass-through ability and assistance from government
• Data quality, availability and lack of forward-looking estimates
• Ignores engagement
• Does not capture physical climate change risk
18. 17
• Focuses on risks and opportunities in a decarbonising world
• Scenario analysis
Climate change
Taskforce on Climate-related Financial Disclosures (TCFD)
19. 18
• Increased commentary by regulators (APRA, ASIC, RBA)
• Shareholder resolutions on climate change (and other ESG issues)
• Investor engagement on climate change
• Launched in 2017
• More than 370 investors with more than US$35trillion in assets.
• Encouraging companies to:
• Curb emissions
• Improve governance
• Strengthen climate-related financial disclosures (TCFD)
• Summary: inevitable policy change but companies can’t afford to wait
Climate change
Other investor considerations
20. 19
Plastics and waste
The problem (and opportunity) with plastics
• The Investor Declaration on Plastic Pollution (IDPP), issued by the global Plastic Solutions Investor
Alliance (PSIA) is an opportunity to focus on the issues and find a new path forward.
• Taking action on plastics provides significant opportunities in moving towards the UN Sustainable
Development Goals, and new areas for investment.
• The culmination of plastic developments creates two major investment themes: The changing profile
of demand for plastics and packaged goods; and the regulatory transition to a circular economy.
• ESG engagement is an avenue that investors can use to ensure adequate risk mitigation in
companies held in the portfolio, and to allocate away from poor performers.
21. 20
Increased focus on the ‘S’ in ESG
Human rights and modern slavery in focus
• Historically, more focus on the ‘E’ than the ‘S’ but changing.
• Various ‘S’ issues impacting valuation
• Increased importance of intangible drivers
• The UN SDGs
• The Australian Modern Slavery Act (MSA)
The Australian Modern Slavery Act was
passed by both houses in late 2018.
22. 21
Increased focus on the ‘S’ in ESG
Modern slavery and the Modern Slavery Act
• Background
• Estimated to be ~40m people in modern slavery conditions globally
• Modern slavery is very prevalent in Asia but Australia is not immune
• Key risk sectors: building materials and construction, electronics, mining,
fishery, agriculture and garments.
• Key risk imports to Australia: electronics, garments, fish, rice and cocoa
• Analysing industry dynamics can identify red flags
23. 22
Increased focus on the ‘S’ in ESG
Modern slavery and the Modern Slavery Act
• The Australian Modern Slavery Act (MSA)
• Ausbil’s investor statement on slavery (2016)
• More than an ‘ethical’ issue – links with earnings sustainability
• Transparency Act, based on UK MSA with no financial penalties
• Covers organisations with > A$100m in revenue and operations in Australia.
• Reporting against seven mandatory reporting requirements on risk of slavery in
operations and supply chains.
• Risks, actions and effectiveness
• More powerful than the UK version: 1) mandatory reporting requirements, 2)
applies to the Federal government, 3) central database and 4) investors and
investment portfolios.
24. 23
Increased focus on the ‘S’ in ESG
Modern slavery and the Modern Slavery Act
• Investor implications
• Understanding the risks, e.g. Global Slavery Index (GSI)
• Engagements
• Take a broader view on human rights
• Encourage best practice (key learnings from field trips)
25. 24
Summary
Latest developments on the Environmental, Social and Governance (ESG) front in 2020
• ESG integration means different things to different investors
• Company value is increasingly driven by intangible factors
• ESG integration is driven by a number of factors and needs to be aligned with the investment
philosophy
• Responsible investment is evolving; more focus on engagements, momentum and ESG outcomes.
• Key initiatives: UN SDGs, TCFD, Climate Action 100+, the Plastics Solutions Investor Alliance and
the Modern Slavery Act
• Inevitable policy response on climate change but some companies are moving ahead of regulators
• Footprinting has limitations and TCFD will be the new climate change reporting norm
• Climate change means physical climate change as well as transition
26. Contactus@
ausbil.com.au
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