ESG as a journey – climb on board and add value

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ESG is a journey, according to Mike Cantara. It’s about the discovery of a lot of things: from what it means to be a proper long-term fiduciary investor to what it means to be a proper long-term individual investor with a moral compass.

Mike Cantara is the co-chair of the Boston-based MFS Investment Management’s ‘Sustainability Group’. He has been with MFS for about 18 years and is part of what they call the ‘president’s council’ and also a member of the global distribution management committee.

He said last week, after a recent visit to Australia, that MFS, which has had a long history in Australia, climbed on board 12-or-so years ago when it investigated what it meant to join the UNPRI, of which many Australian super funds and managers are now members. Fiona Reynolds, an Australian and a former chief executive of AIST, is the London-based chief executive of PRI.

“We quickly came to the conclusion,” he said, “that the PRI principles really suited us as long-term investors. It clearly made sense for us to allocate our investors’ capital responsibly… About 80 per cent of our assets are invested for retirement.”

For its global equities strategy, the average portfolio stock holding is about eight-and-a-half years, compared with closer to two years for the institutionally held stocks in the MSCI index. The long-term fundamentals have always driven long-term returns for MFS, Cantara says.

If you look at the US S&P 500 make-up, as fund managers and their clients do, you will know that about 85 per cent of the stocks’ value is in intangible assets. This compares with a number more like 14 per cent in the mid-1970s, Cantara says.

“What we are investing in these days are IP, brands, services, non-physical assets. And they are driving massive amounts of value. Management teams have to think about things differently. They also have to think about how they manage their stakeholders.”

Which brings us back to ESG. MFS is integrating, as other big asset owners and their global managers are doing, its ESG analyses into all its portfolios. But, it has to be said, there are obstacles in the process. Cantara says: “It’s about valuations, not values”. MFS does not try to second-guess the morals of its investors. It, rather, tries to adapt those morals to enhance the returns of the portfolio. The ‘G’ in ‘ESG’ is increasingly, when addressed, leading to better returns and, interestingly, increasingly linked to the ‘S’ and ‘E’. Better governance, about which there is little doubt, means better observance of environmental and social issues. The ‘E”, ‘S’ and ‘G’ are inexorably linked.

Cantara says that MFS tends to look at its portfolio companies from the perspective as to whether they will be around in 10-15 years’ time. The directors and managements need to know all the risks and how they are looking to create value over the longer term. “You have to look past the glossy brochure and understand the underlying business,” he says.

Having travelled to Australia many times, Cantara says that the institutional trends, such as fee pressures, are occurring all around the world. Fund managers need to adapt accordingly, he says.

He believes there will always be a need for advice and that technology will make this more accessible. MFS wants to be the best at what it does, not necessarily the biggest, he says.

MFS’s history in Australia dates back to the early 1990s. Before setting up its own shop in 2012, the manager was represented by a long-term third-party marketing arrangement with BNP’s investment arm under Alan Beasley. Beasley had followed the erudite Ouma Sananikone as head of BNP’s Australian investment business, which then included star portfolio manager Anton Tagliaferro.

Ouma left BNP to take control of the then-flagging EquitiLink group which she successfully rebuilt and then sold to Aberdeen Asset Management for more than $100 million, making who were known as the ‘EquitiLink Twins’ – Brian Sherman and Laurence Freedman – very wealthy individuals..

But BNP’s domestic business went into a decline, suffering from over-expenditure and staff losses including, most importantly, the loss of Tagliaferro, who set up his own business, Investors Mutual, now a part of the Pacific Current multi-affiliate group.

Back at BNP, the saviour for the business was its third-party marketing contract with MFS. Beasley was effectively replaced by Rob Harrison and current MFS country head, Marian Poirier. Rob stayed with BNP and was promoted to its New York office, a position he left last year.

Poirier spent over 10 years with BNP, helping with the MFS account for most of it, and then taking on the top position when the Boston-based firm decided to set up its own operation here.

She said last week: “MFS has a long-term focus in everything it does, from how we run our business, to how we manage our people and, importantly, how we invest our clients’ capital. Allocating this capital responsibly has been and will continue to be the principal reason for our existence, with ESG materiality analysis playing an increasing role.”

– G. B.

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