‘ Climate change’ the new reporting bywords
THERE is no doubt that climate change is the poster child of sustainable investment. While the concept may mean many things to many people, for the retail investor concern over the environment is the most probable motive.
According to the US Securities and Exchange Commission, the term climate change’’ appeared 7643 times in 2008 firstquarter company filings — a 590 per cent increase on 2007 equivalent figures, when it received just 1107 mentions.
Yet along with this new- found popularity comes a whole raft of mistakenly interchangeable terms.
If you’re confused by the range of terminology — green, ethical, SRI, CSR, ESG, sustainability, responsible investment — you’re not the only one. The investment industry itself seems equally confused.
Essentially, there are two investment camps — the old school, which adopts a conscientious approach to stock analysis, and the emerging vanguard which adopts a more clinical approach.
Green, ethical and socially responsibIe investment are moral and subjective investment drivers. Corporate and social responsibility, environmental, social and governance, sustainability, and the more recent but not yet widespread term of responsible investment have evolved out of the former to present a watered- down but more fundamental business argument.
Most of the traditional ethical or SRI investment approaches will exclude companies in certain sectors such as tobacco, arms manufacturers, deforestation and gambling — a process called negative screening. In conjunction with this approach, deep green’’ managers proactively seek out companies with a potentially positive impact on the environment and the community.
Yet another best of sector’’ approach doesn’t focus on exclusion but tries to find the best companies in every sector according to their environmental, ethical, social and governance stance.
However, while SRI and other criteria appear doomed to remain a niche, philanthropic, investment- style, sustainable investment is becomingly increasingly accepted among investment managers because it doesn’t impose the restraint of negative screening — the biggest hurdle to SRI’s wider adoption by the mainstream investment community.
Zurich claims to be the latest Australian company to sign up to the UN’s Principles of Responsible Investment — an undertaking to incorporate ESG factors into investment analysis and decision- making processes.
Zurich’s director of investments Matthew Drennan, while not a fan of SRI, is happy to embrace a sustainable approach.
SRI is not a concept that we subscribe to because if you think about it from a social perspective it means 100 different things to 100 different people. I don’t believe in putting funds together which screen out stocks within the ASX universe. I think a much more sensible way to approach the issue is to look at it from a risk- based approach and not a moral screening view.’’
Sustainable investment is a risk and opportunity focused evaluation of ESG issues and their potential financial impact upon a company’s bottom line, share price valuation and long- term growth expectations. Which ESG element presents the highest risk or opportunity will depend on the nature of the company being considered for investment.
So, for example, a mining company’s impact on the environment will be of most importance whereas the social aspect of a service- based company, such as how it treats its staff, will be paramount.
Governance analysis is important across all companies in order to avoid such spectacular falls from grace as HIH, Enron, WorldCom, Arthur Andersen — the list goes on.
Insurance Australia Group pays out more than $ 14 million every day in insurance claims. For chief risk officer and group actuary Tony Coleman this practical, sustainable approach to risk very much appeals: It is a business approach that creates long- term shareholder value by employing opportuni- ties, but also managing risks deriving from economic, environmental and social developments.’’
BT Institutional Australian Sustainability Share Fund portfolio manager Rajinder Singh believes that companies should be incorporating these issues into all stock analysis from a long- term sustainable perspective. Ethical investing is a dogmatic judgment. Sustainability is different. It is really looking at investing for the long term and is increasingly being deemed as responsible investment,’’ he says.
He says this moves it on from risk mitigation — which is, what are my risks and am I going to get sued because of my E, S or G, — and on to grabbing the opportunities.
One excellent example of such a sustainable investment opportunity is illustrated in a slide presentation called Enlightened Self Interest from the Responsible Investment Association of Australasia.
It highlights US legislation which dictates that utility companies will have to decrease their carbon emissions by 25 per cent by 2020.
While Exelon Corporation will sacrifice less than 1 per cent of its earnings to meet the new regulations, ( being invested in nuclear fuel, renewable energy, bio- fuels and energy efficiencies), by comparison American Electric Power will lose 18.7 per cent because it is heavily reliant on coal.
The executive director of the Responsible Investment Association of Australasia, Louise O’Halloran, has said anywhere between 77 per cent and 85 per cent of a company’s value cannot be seen with the naked eye, and that responsible investment is about finding out more and better information about what is really driving a company’s value.
Judging risk: Zurich’s Matthew Drennan