Rest Super sees a real financial impact from ESG engagement and plans to broaden it to unlisted and sovereign assets.
Environmental, social and governance (ESG) engagement with listed companies has real-life financial implications, especially when it comes down to climate change-related issues.
Academic research has shown companies that have been successfully engaged with also show fewer incidents relating to environmental issues.
Institutional investors, therefore, should be proactive in their discussions with companies, or hire a third party to do this for them, as they have a financial responsibility to their members, Leilani Weier, General Manager of Responsible Investment and Sustainability at Rest Super, said in a panel discussion at the JANA Annual Conference last week.
“Everything that we do has to be in the members’ best financial interests and we’re quite disciplined at making sure to take note of that in terms of documentation,” Weier said.
Using engagement service providers … we get to input into topics that we think are important for our investment portfolio and then we do have a reliance on our engagement partner to engage on those issues for us because managing a portfolio of 200-plus listed companies for these issues is next to impossible just doing it alone
“I think there’s risk as in enterprise risk frameworks and then there’s risk and return that a portfolio manager and investment team would manage.
“That’s why the responsible investment team at Rest sits in the investments team, with very close and integrated relationships with all of our asset class teams. We see ourselves as one team.”
She said funds didn’t need to hire large teams of ESG specialists to engage successfully and can use external parties where needed.
“Using engagement service providers … we get to input into topics that we think are important for our investment portfolio and then we do have a reliance on our engagement partner to engage on those issues for us because managing a portfolio of 200-plus listed companies for these issues is next to impossible just doing it alone,” she said.
“We have that in Australia and overseas. It means that we’ve got some good coverage, whilst also having a set of material companies that we will internally also focus on.”
Academic Backing of Financial Impacts – A New Study
Weier has been studying the academic literature to back the idea that ESG engagement has a financial impact and she has been following the work of Professor Andreas GF Hoepner, a Financial Data Scientist with the University College Dublin School of Business, for some time.
“He has been studying this for almost 10 years now and finally he put out a fantastic research paper [last year],” she said.
“He talked about stewardship being so important to minimise the downside risk of companies and he also had some great case studies around the Value at Risk (VaR) and particularly as it relates to a company’s environmental risks.”
In the paper, “ESG shareholder engagement and downside risk”, Hoepner and his colleagues describe their finding that companies showed a reduction in VaR, after successful ESG engagements, relative to control firms.
“We find the VaR declines by 0.205 from before to after the engagement, which is economically significant (9 per cent relative to the standard deviation),” the researchers wrote.
Weier said this shows engagement is important for superannuation funds as it directly impacts investments.
“That is quite a convincing reason why you would do this, compared to a control group of companies where there was no engagement,” she said.
“And the other thing that this longitudinal study found was that there were fewer environmental incidents in those companies too and often on the back of engagement the company would probably become more aware of the topic and then better manage it.”
Integrating Nature Risk into Portfolios
One of the more recent ESG topics Weier has been looking at is nature risk. These risks encompass any negative financial impact from nature degradation and loss of biodiversity.
But it is not straightforward to calculate, Weier warned.
Last financial year, we sourced help from an investment consultant who had an expert in nature and we worked very closely with them in working out which companies … to focus on for nature risk impacts and dependencies. And off the back of that work, we now have a very clear plan of the 10 companies that we would focus on for nature risk
“Nature is a very interesting topic and it’s difficult, actually, in investment portfolios. Last financial year, we sourced help from an investment consultant who had an expert in nature and we worked very closely with them in working out which companies … to focus on for nature risk impacts and dependencies,” she said.
“And off the back of that work, we now have a very clear plan of the 10 companies that we would focus on for nature risk. The work that was delivered to us was absolutely excellent because there was a financial cost … if we didn’t address nature risk with those companies.
“It has absolutely enhanced and matured our active ownership approach that we will take forward now for the next three to five years. So that’s a good example of assessing portfolio risk across the portfolio and then taking action through engagement.”
Engagement Outside of Listed Assets
Although historically ESG efforts have been largely directed towards listed companies, increasingly these policies are now also applied to private markets. Yet, extracting the relevant data from this segment of the market is more difficult as there are fewer regulations and incentives for unlisted companies to provide this information.
More recently, there have even been efforts made to apply ESG to sovereign instruments and Weier pointed to the United Nations-backed Principles for Responsible Investment (PRI), which has been active in this space.
“We have to keep going with listed because I think good progress has been made there, but there are also opportunities with engaging sovereigns. The PRI have taken it to Canada and Japan and are engaging with the government [on the] issuance of debt and on how climate risk is being factored into that issuance,” she said.
“Our internal fixed-income team is also extremely engaged in that process.”
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