ESG is good for the bottom line

Applying ESG measures to investment portfolios does not automatically come at a cost to profitability - and can even be good for business.

That was the view of panelists on the Future of Investing session at FINSIA Summit 2019 in Melbourne.

Investors have even been known to ask fund managers to go further, according to Mercer’s Alexis Cheang.

One insurance firm told her recently that profit maximisation wasn’t the end goal - as long as invested capital was secure.

But Cheang, a sustainability specialist, did admit the question about profit is a common one “that comes up in nearly every asset owner workshops we run.

She said: “I think the answer is not necessarily.

“It really depends on how you define ESG and sustainability within your organisation. 

“The principles for responsible investment is focused on integrated material environmental, social and governance factors into portfolios - and then using your influence as an owner to encourage companies to behave better. 

“A strategy that focuses on ESG integration and active ownership has no conflict with a profit motive. 

“There are no screenings, there are no ethical lenses, it's just better investment governance, investment management. 

“Having said that, many of the clients we work with feel that that does not go far enough.

“Many funds have said, investing in tobacco is inconsistent with who we are, with what our members are looking for, and with the sustainability of the communities who benefit. 

“Therefore, we're going to exclude tobacco. Now some of them have said, but what will that do to our performance? 

“If you did a back test you will see that the tobacco sector performed exceptionally well over the last 10 to 15 years.

“But that doesn't mean they would perform equally well in the forward looking basis.

“Some might say, is excluding tobacco consistent with maximising shareholder returns? 

“Our analysis shows that you can maintain a very well diversified portfolio, multi-asset portfolio, and not give up returns over the long-term. 

“If you exclude sectors like tobacco or gambling or alcohol, there may be periods over the short-term throughout the cycle where you do get a lower return. 

“I think having that conversation is critical, particularly if you're aptly regulated, but it's also worth asking the question, is profit maximisation actually what we're seeking? 

“We have very interesting dialogue with an insurer recently who said, "We're not about profit maximisation, we're about capital preservation, managing volatility, and ensuring that our members have a stable and reliable return or income." 

“Therefore, we can exclude certain sectors, we can integrate ESG, and we can invest sustainably with a focus on managing volatility and ensuring a consistent income stream for our members. 

“Because our goals isn't to be the highest risk, flashiest, highest profit fund, it's to deliver what our clients expect of us which is a sustainable return.”

Fellow panellist Dr Kingsley Jones added: “There are other areas where profit maximisation is an interesting one. 

“You might argue that if you restructure a certain industry, the profits might actually improve them and the ESG performance.”
For Global Impact Investing founder Giles Gunesekera, ESG comes before questioning profitability. 

He said: “In Europe this topic is done. Unless you have a very, very good ESG policy in process, you don't get to the table, you don't get to pitch for business with pension funds. 

“ESG very, very soon will just be a given. As a fund manager you'll have an investment process and that investment process has to have ESG embedded into it, and if it doesn't you'll just won't grow.”