The rise of impact ESG investing is a reflection of the failure of governments to address community concerns about environmental, social and governance issues.
Speaking at the Financial Service Council (FSC) Summit in Sydney yesterday, Fidelity International portfolio manager Kate Howitt says previously when the community wanted certain environmental standards, they would elect people to make the laws leading to companies following these laws and solving the environmental problem.
Howitt says: “In recent decades that process is working less and less well, as everybody seems to have a view that they can’t get it expressed through the normal policy and law-making process.”
Chief investment officer at UniSuper, John Pearce agrees: “The question as an investment manager that we have to address is how to convert global warming into an investment thesis.”
While this thesis can come in many forms, Pearce is adamant that divesting from fossil fuels is not enough and the efficacy of divesting is “pretty much zero”.
There has been a shift in the policy making process as investors can now see real change by going through their investment managers to address these concerns.
Howitt says: “If you do want action on climate change, large multinationals have got to be the solution because they are the ones that have the reach, the execution and the capability. The rules have shifted from ‘I need to obey the law and job done’, to ‘the community wants more from me.’”
In late July, BHP announced its Climate Investment Program worth US$400 million aimed at counteracting its own emissions and the emissions generated by its customers.
Chief executive of BHP, Andrew Mackenzie says: “These emissions are generated as customers transport, transform and use our products to serve the needs of billions of people and they are almost forty times higher than the emissions from our own operations.”
Howitt says: “That’s interesting because some of the largest companies in the world have better execution capabilities than governments, they have to be part of the solutions as they have the capability.”
Pengana Capital Group and the investment manager of its sustainable impact fund, WHEB Asset Management, released its Prosperity With Purpose report earlier this year which quantifies the positive impact of investment in the fund.
The report reveals that in 2018, the fund contributed to avoiding 218,000 tonnes of C02 emissions, generated 464,000 megawatt-hours of renewable energy, recycled 49,000 tonnes of waste, treated 2.6 billion litres of waste water and provided 29,000 days of tertiary education.
The $30.6 million Pengana WHEB Sustainable Impact Fund was launched in 2017 and its objective is to achieve capital growth over the medium to longer term. Since it was launched the fund has produced a return of 5.5 per cent a year, compared with 5.6 per cent for the MSCI World Total Return Index.
George Latham, managing director at WHEB Asset Management, says: “Population growth, resource scarcity, environmental degradation, and a myriad of social issues are increasingly motivating investors to examine the social and environmental impact of companies and how these businesses adapt and respond to these investor pressures.”
Ethical investing has developed from primarily focusing on negative screening then shifting to the idea of ESG analysis. But according to Latham, while this was a step in the right direction it was not a holistic approach.
Latham says: “This typically ignored what the business was selling and whether or not it was selling something sustainable. So, we only invest in a business where we can say that selling more of that product is leading to a better environmental or social outcome.”
WHEB’s single strategy is investing in businesses where the product or service that is the source of revenue is a solution to a sustainability challenge whether it be environmental or social.