Super funds show greater awareness of ESG issues
22 Aug 2012
Australian superannuation funds are becoming more aware of the role they play in managing and protecting their members' investments for the long term by recognising the impact of environmental, social and governance (ESG) issues, according to Solaris Investment Management
The Australian equities fund manager has seen a gradual increase in awareness of ESG issues among clients and believes those who have an understanding of the subject may represent opportunities for outperformance. Correspondingly those that do not could experience underperformance. Lisa Domagala, Solaris ESG analyst, says: "Several of Solaris' institutional clients have requested ESG cognisance form part of their investment mandate."
Nor is Solaris alone. Susheela Peres da Costa, head of ESG services for Regnan, which undertakes governance research and engagement, says the ability to allocate capital is a very powerful voice and over a number of years superannuation funds have begun establishing and using that voice in the interest of their members.
In addition, disclosure has tended to focus on very narrow financial outcomes. Quite recently, though, companies have started to consider reporting to the market on things like their exposure to carbon pricing or their relationships with key stakeholders, according to Peres da Costa. "We have also seen initiatives like the Global Reporting Initiative where funds have come together to negotiate with companies the kinds of disclosure they're going to find useful in understanding the long term value of [investments].
"One of the very interesting features, particularly of disclosure, is that in many cases these are things that companies regard as important as well - the way they're managing human capital, their access to labour, their access to resources that are crucial to their business."
Peres da Costa adds it has been a frustration that when the companies speak to mainstream financial markets, there is a lack of interest in them. "So in some respects they have found it a welcome change that super funds have started to show an interest and to drive that interest through their investment management supply chain. The key for super funds is to consider how governance is being applied within their portfolios, and not just within companies."
The ability of macro-level ESG and systematic issues to undermine investors' interest was a major theme raised at a UN conference on principles of responsible investing held in July, according to Domagala. "To date, most ESG integration and activity occurs at the company level, predominantly focused on alpha generation and preservation. Generally, it aims to ensure that all material ESG factors are considered when assessing company valuations.
"However, market events over recent years have demonstrated that focusing on an individual company level may not be sufficient if broader macro ESG considerations are not addressed. ESG consideration of the future will also need to address macro issues as well as company-specific opportunities.
"To this end, the UN PRI is looking to address broader issues relating to the function, governance and structure of markets. The PRI believe that this will assist in their endeavour of ensuring that responsible investment will become mainstream."
Author: Keith Power