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Catch the Wave of Sustainable Investing

Written by Cameron Gilenko

March 18, 2021

The importance of ESG is not slowing down. In fact, it is quickly becoming the most important theme for investors, evidenced by the increasing pools of capital being allocated to ‘sustainable investing’.

Larry Fink, Chairman and Chief Executive Officer of BlackRock, highlighted the importance of climate change and the impact it is having on the market in his 2020 Letter to CEOs, “climate change has become a defining factor in companies’ long-term prospects” and as a global economy we are “on the edge of a fundamental reshaping of finance”.

BlackRock, the world’s largest asset manager, with ~US$8.7 trillion in assets under management, then and there vowed to place sustainability at the centre of all investment decisions and their global client base did not take long to follow this strong lead.

“No issue ranks higher than climate change on our clients’ list of priorities. They ask us about it nearly every day,” Fink wrote in his 2021 Letter to CEOs.

Typically, when BlackRock speaks, every investor, big or small, should listen and take note. In most cases investors will follow with their own money and this is certainly the case when it comes to sustainable investing.

Fink highlights that from “January to November 2020, investors in mutual funds and ETFs invested US$288 billion globally in sustainable assets, a 96% increase from the whole of 2019.”

From a domestic standpoint, Australian investors also began the transition to a ‘greener’ portfolio.

Morningstar, a leading independent global investment research and management services provider, highlighted that at the end of calendar 2020, more than $22.5 billion in retail funds across Australia and New Zealand were held in sustainable investments, representing a 20% year-on-year increase.

The COVID-19 pandemic highlighted the need for a different approach to investing, with policymakers and investors drawing parallels between the unforeseen risks of a pandemic and the growing concern around a climate change driven black swan event.

What does this mean for ASX listed companies?

As a company, if you have failed to realise the importance of sustainability, and the three critical factors of Environment, Social and Governance (ESG), it’s time to pull your head out of the sand.

Across the globe, investors are becoming increasingly vocal about ESG and the requirement for companies to stand-up, pay attention and disclose their impact.

Every listed company, no matter the size or valuation, needs to prioritise ESG as a critical, long-term strategic objective. Failure to do so will significantly impact long-term growth and success.

Ben Swan, Director & Principal Consultant at Futureproof, a specialised ESG and sustainability reporting agency, highlights the increasing importance of ESG across ASX companies and the growing expectations for companies to disclose their impacts and future targets.

“Gone are the days when ESG and sustainability reporting only concern Australia’s biggest businesses. Expectations for companies to disclose their impacts, both positive and negative, are slowly but surely making their way down to mid-caps and SMEs,” he said.

“Companies are engaging with ESG for a range of reasons, including project financing, attracting institutional investors to their registers, pressure from current investors or being rated poorly by an ESG ratings agency. Smaller or recently listed companies have an advantage of being able to build ESG into their internal systems and processes before growth drives complexity, avoiding the need to retrofit in the future.”

A recent white paper by Fidelity International analysed the market crash during the height of the pandemic, testing the effect of this volatility on companies with different environmental, social and governance characteristics.

It shows a strong positive correlation between a company’s relative market performance and its ESG rating, which held firm across a nine-month timeframe in the face of the pandemic during 2020.

The analysis concluded that companies with high sustainability ratings performed better than their peers when markets fall. This finding bore out Fidelity’s initial hypothesis that companies with good sustainability characteristics have more prudent management and will demonstrate greater resilience in a crisis.

Source: Australian Financial Review, AFR Focus: Investing ESG, 17 March 2021

Effective development and ongoing implementation of ESG requires strong leadership and a willingness to change for the better. It is not about just ‘talking the talk’, but actually ‘walking the walk’. This should be a top concern and priority for all Boards and management, no matter the industry in which they operate.

For companies that haven’t started this journey, there are some important principles to follow when establishing your ESG framework and policies:

  • Is the current business model fit for today’s corporate world? Consider the resilience of your business model in a transitioning world.
  • Pick your battles by determining materiality – what are the top three, non-financial value drivers or risks to value destruction that your business faces.
  • Get your house in order and start tracking outcomes – Before worrying about disclosure, consider progressing commitments and policies, delivering outcomes and tracking them now, so you have a story to tell in the future.
  • Robust disclosure – High level sound bites are not enough to deal with the complex issues, disclose impacts against targets as you would your financial performance.

There is empirical evidence linking strong ESG performance to improving operational culture, brand profile, retention of staff and long-term value growth. Investors are attuned to it and you should be too.  The time to act is now.

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