‘ Cli­mate change’ the new re­port­ing by­words

The Weekend Australian - Review - - Investments - Claire Galea

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

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.