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Fund managers warn against ESG neglect

Written by Genevieve Norton

February 14, 2019

When the Chairman and CEO of BlackRock speaks, the global investment market tends to listen. So when Larry Fink asserted recently that within the next five years all investors will measure a company’s impact on society, government and the environment, to determine its true worth, savvy Boards and Executives of publicly-listed companies took notice.

While the concept of analysing Environmental, Social and Governance (ESG) metrics to drive investment decisions is not new, investor expectations around ESG are at heightened levels and continuing to evolve at a rapid rate. Once seen as a requirement of the mega-cap companies only, to underpin their social licence to operate, ESG strategies and quality reporting on those strategies now applies at all levels of public companies.

Competition for capital has never been tighter, suggesting companies of all sizes and across all sectors should be seeking whatever advantage they can realistically control to get ahead of their peers.

“I believe that the demand for ESG is going to transform all investing,” Fink said in late 2018. Which is worth paying attention to when you consider that BlackRock manages US$6.4 trillion in assets, making it the world’s largest asset manager.

But it seems the demand for quality ESG reporting extends well beyond BlackRock, with predictions in October 2018 that all assets in ESG-focused exchange-traded funds (ETFs) would grow from US$20 billion to more than US$400 billion by 2028.

And the trend towards higher accountability around ESG performance is having an impact domestically as well. Chris Prunty, Director and Portfolio Manager at QVG Capital, which focuses on small to mid-cap ASX stocks, says ESG is real and the big investors in the Australian market, such as the large superannuation funds, are proof of that.

“They are increasingly focused on a company’s environmental, social and governance performance because their customers demand it and… they are the thought leaders of institutional investment.”

“While a company’s value is fundamentally determined by its cash flows, a company’s commitment to ESG-related metrics points to the sustainability of those cash flows over the long term, which is important when trying to determine the genuine growth stocks,” Prunty says.

“When identifying investment opportunities, all else being equal, we would lean towards companies that have invested in the systems and processes that are ahead of what is simply required by regulators.

“Companies investing in their systems and processes signal to us a certain quality of management and culture. It tells us that a company aspires to excellence in everything it does, which hints at a positive company culture right across the board.”

ESG becomes increasingly important as companies grow. While those outside the ASX300 will rarely be tested on their ESG credentials, if they aspire to grow and move through the indices to the ASX100, they can expect an increase in ESG enquiry along the way.

“Smart companies will start the process of reporting on ESG-related metrics sooner than later, so they can demonstrate a track record of performance,” Prunty concludes.

Like most dedicated lines of communication, success is typically achieved through the establishment of suitable frameworks to capture and benchmark performance, around which a corporate narrative can be established.

Importantly, ESG reporting and related communication must be credible and demonstrate a genuine commitment to operating at an optimal level. It has been shown that doing so also transfers the essence of a company’s culture, supporting the attraction and retention of a stable and committed workforce.

John Gardner is a founding Partner of Citadel-MAGNUS and joint Managing Director of the firm based out of the Perth office. He has more than 20 years’ experience in corporate communication and investor relations in Sydney, Perth and London. His experience includes the development of corporate, investor relations and transaction communication strategies for clients across a broad range of sectors. He has led the communication on many highly successful transactions and provided counsel to management on several complex issues in the corporate sector.

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