General

The world’s biggest owner of publicly traded stocks, Norway’s sovereign-wealth fund, is about to get the political go-ahead to insist that all companies in its portfolio have clear targets for cutting CO2 emissions.*105

Financial regulators are warning the economy risks missing out on foreign investment and being penalised by other countries unless Australia sets climate change rules that are similar to those overseas. Europe is leading the charge in setting sustainable finance rules for banks and fund managers, which will determine if they can lend money and invest in certain industries and countries including Australia.*106

Consumers have only a limited understanding of net zero emissions, but as their knowledge increases they are likely to put more pressure on companies to act in an environmentally responsible way.

Analysis of the survey data suggests that as consumers’ awareness of the debate over net zero emissions increases, they will agitate for companies to be more environmentally friendly*107

In BHP’s case, Mike Henry had to get out of oil and gas if he wanted to retain the support of the world’s largest investors, such as BlackRock and Vanguard, which are prioritising environmental, social and governance issues.*108

Ahead of the COP26 summit in Scotland – which was seen as a pivotal moment in the fight against climate change – HFR’s survey found that three-quarters of funds engage with their portfolio companies on ESG issues, while 25 per cent did not.

Meanwhile, 77 per cent of funds interview said they consider climate change in their investment processes, while 23 per cent did not.
As impact investing and sustainability themes have come into sharp focus over the past decade, ESG investment factors have gained greater prominence within the global asset management industry, with allocators placing ever-greater scrutiny on how their portfolios and investments meet the climate challenge.*110

Since the beginning of the pandemic, sustainability-correlated exchange-traded funds and sectors with a direct or indirect link with the environment, social and governance (ESG) factors (health, clean energy, technology) have had a good run. ESG, in fact, has been the winning horse in the alpha stakes.

A report from the Bank of America says ESG funds globally are growing three times faster than non-ESG funds.

“ESG has been one of the fastest-growing segments in the world and every study indicates that the amount of money going into it is unprecedented,” says Bhanu Singh, head of Asia Pacific portfolio management at Dimensional, which manages $800 billion in assets globally, including $45 billion for Australia and New Zealand clients.

“We have been running socially filtered strategies since the 1980s for various clients, covering things like tobacco or alcohol exclusions or sharia law,” says Singh. “For the past 15 years, we’ve been applying environmental sustainability strategies. Our primary focus is greenhouse gas emissions. We manage to lower emissions intensity exposure for clients in these strategies by about 75 per cent or more.

“About 80 per cent of our net inflows this year have been into sustainable investment strategies.”
Industry is rushing to provide new products to whet investor appetite for sustainability-correlated investment vehicles, Singh says. And investors are going into it primarily because they are eager to align their values with their investments, but also because of the high performance of ESG products.
ESG is more than a theme, it’s part of the landscape of investment, says Jonathan Shead, Head of Investments, Australia, at State Street Global Advisors.

“We are already seeing markets pay attention to environmental issues, with GHG (greenhouse gas) emissions being the most recent and obvious example,” he says.

“However, markets are also paying attention to social issues like customer privacy, data security, product safety, and employee health and safety. The story is the same on governance issues. We have seen significant investor interest, for example, in board structure and remuneration, corporate culture, ethical behaviour and risk management.

“In short, the market is already moving to include ESG issues in broader assessments of a company’s future growth and profitability,” Shead says. “I don’t see ESG as an investment theme that will run its time and pass – it is here to stay.”*111

Money is flowing into green bonds, social bonds and sustainability-linked bonds as companies show the market that they’re serious about reducing their carbon footprint, says Jay Sivapalan, head of Australian fixed interest at Janus Henderson Investors.

The number of green, social and sustainability bonds issued in Australia in the first half of this year almost equalled the total for 2020. The largest green bond issue, the first sustainability-linked bond and the most diverse set of deals for investors have manifested this year, the asset management house confirms.*112

It comes as a new survey by global law firm Ashurst of almost 1000 senior managers across G20 countries found almost every organisation, large or small, had set a net zero emissions target or is developing one.

Mr Israel said capital and investors had mobilised behind tackling global warming.

“They have made it clear. Business wants to make it happen,” Mr Israel said in an interview with The Australian Financial Review.

“The momentum is huge for investors and now for the market, particularly after COP26, these things have become very important for new investors.*113

Investors will begin moving away from companies with poor environmental, social and governance ratings as 2030 approaches, with the likelihood of a new “biodiversity” returns class to be created inside the decade, a KPMG report says.

It says the increased cost of meeting high ESG expectations will also likely mean companies that perform better under those categories will become more costly to invest in inside the decade.

A new “biodiversity returns” rating would likely build in prominence, with more than half of global gross domestic product – about $US41.7 trillion ($58.5 trillion) – reliant on high-functioning biodiversity and ecosystems, while a fifth of countries across the globe were at risk of their ecosystems collapsing.

One factor driving change towards strong ESG policies was from inside the workforce itself. Employees were becoming more conscious of the impact of their work, Mr Mabbott said.*114

ESG has moved to the front and centre of discussions between companies and investors, nudging aside financial issues when those discussions involve heavily exposed industries such as mining. Along the way, the scrutiny of ESG claims has intensified, putting the onus on company boards and managers to walk the walk rather than just talking the talk.*115