How big funds are implementing ESG principles

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by Greg Bright

At a recent institutional investor roundtable in Melbourne, organised by Martin Currie Investment Management, the consensus seemed to be that solid ESG principles needed to be integrated within a big manager’s portfolios. But that’s where the consensus among the investors stopped. Implementation is not as clear-cut as you’d think.

Martin Currie, an Edinburgh-based global equities manager with a big Australian equities presence, tends to straddle the fence with ESG (environment, social and governance) considerations. It has specific funds under various guises such as ‘responsible’, ‘sustainable’ and ‘ethical’, but, more importantly, it also integrates the main principles of ESG in everything it does. It provides an interesting test case for how the funds management world is likely to develop with respect to ESG.

The recent direction, for both pension funds and their managers, with which Martin Currie can claim a head start, is in providing ‘stewardship’. It’s actually the sort of fundamental thought and management processes that one would hope the final report of the Royal Commission into Australia’s banking and super system will address – but probably won’t.

According to David Sheasby, the UK-based head of ‘stewardship’ for Martin Currie, there are three broad areas to be addressed:

  • How ESG considerations are integrated within a firm; how the manager acts as an engaged ‘owner’; and, how the manager works to promote better behaviour by the investee companies
  • What the client’s needs are, and
  • How the manager runs its business.

“The challenges facing society are unprecedented and extraordinary,” he said at the roundtable, which included about a dozen super fund executives, asset consultants and researchers in Melbourne last month. “Companies are facing increasing pressure from multiple stakeholders. For example, in Europe, tax avoidance by some global companies through registering their IP in tax havens has become an issue,” he said.

The investors present, talking under the Chatham House Rule, had no issues with any of that. They wanted to get down to the nitty gritty of implementation and the reporting of what asset owners and managers actually did. Martin Currie has been a signatory of the United Nations PRI (Principles of Responsible Investing) since 2009.

Martin Currie’s holistic view, according to Kimon Kouryialas, the Melbourne-based head of Pan Asia distribution, is that “there is no such thing as a perfect company”. He said the manager did not look to provide a “negative screen” – excluding various companies and sectors from consideration as investments – unless under client instructions, or with specific funds. “Engagement is the most important thing for us in the process,” he said.

With reporting, Sheasby said, it was also about the “right kind”. For instance, if people only saw the positive side in company reports, it was not really “reporting”. And the asset management industry was “terrible” for promoting gender and other diversity, but there was a big industry push to improve that situation.

Megan Scott, Martin Currie Australia COO and administrator involved in its local ESG practices, said the improvements in diversity would not be a “quick thing” to achieve. It would likely be a gradual process, but the industry should have aspirations to do better.

Asked whether having “absolute rules” was helpful, or not, in changing corporate behaviour, Sheasby said that when you divest a sector, such as fossil fuel producers, you are also losing the “licence to engage”. He said: “I’m always nervous about those sorts of negative screens.”

Asked about how fund managers should be reporting on their engagement with companies, which are essentially through private meetings with management, he said that that came down to the portfolio manage4rs’ relationships with the investee companies.

Kouryialas said that reporting was something for the whole industry to consider. “We need to work out what we report, hiow we report it and why we report it,” he said. “We are all okay in our reporting on what engagement we do, but there’s something missing.”

Sheasby said Martin Currie chose what collaborative arrangements, under the PRI guidelines, that it got involved with. Although he is a member of the ESG ‘Engagement Advisory Committee’ at the PRI in London, he said that Martin Currie’s process was that the portfolio managers led the engagements with the investee companies. This is where integration becomes most important.

“We think it’s important that the people who best know the companies should be the ones who are engaging with them on these issues. Not all asset managers do that,” he said.

Martin Currie uses various external providers for information and guidance, such as Ownership Matters in Australia and the MSCI ESG index people globally, both of which are very useful but do not provide “the answer”, according to Sheasby. In fact, there is no one answer to the multiple questions around ESG investing.

Take the issue of “over boarding” for instance. This is where directors take on too many board positions, in their twilight working years, and are probably stretched for time to devote to each individual position. Not to mention being stretched for memory and other mental capacities.

But the nuances include whether the director in question is, perhaps, a chair of another company, rather than just a director, and which directorships are most likely to require his or her most attention.

Sheasby said that his firm always looked at capital allocations and how the boards made their decisions. A company might say one thing but the way it acted did not match up with what it said.

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