Click to edit Master title style Effective Disclosure & Stakeholder Engagement Forum ESG and its Critical Importance to Listed • Click to edit Master text styles Entities • Second level • Third level • Fourth level • Fifth level ANDREW GRAY , Director, ESG & Stewardship, AUSTRALIANSUPER 1/31/2020 1
The Investment Chain – Asset Owner External Investment Model Asset Consultants 100% OF FUND Asset Owners Stockbrokers Fund Manager - Purely External Model - Companies
The Investment Chain – Asset Owner External & Internal Model Asset Consultants SOME Asset Owners % OF Stockbrokers FUNDS - External & Internal Management Model - Fund Manager Company
The Three Pillars of ESG ESG Process Values-based Stewardship Integration approaches
Pillar 1: ESG Process Integration - Maximising investment outcomes (both returns & risk) from integrating consideration of ESG issues - Approached through an investment lens Asset Owner Fund Manager Stockbroker • Incorporate ESG into • Incorporate ESG into • Likely dedicated ESG internal process investment process analyst doing specialist ESG research • Monitor external • May have an ESG manager ESG integration specialist or be done by • Some push to integrate mainstream ESG into mainstream • Across all asset classes analysts/portfolio analysis (equities, bonds, managers property & • Historically aimed at fund infrastructure) • May have a shorter term managers buying/selling (1-3 year) investment activities • Long term investment horizon than Asset horizon • Now also targeting asset Owner owners & therefore also considering governance, stewardship and a longer term focus
Pillar 2: Stewardship - Maximising investment outcomes (both returns & risk) from exercising the rights & responsibilities of ownership - Approached through an investment lens Asset Owner Fund Manager Stockbroker • Beneficial owner so • May have had voting • Not an owner so no formal delegated to them on behalf ownership ownership rights and of the asset owner rights/responsibilities responsibilities ultimately sit with the asset owner • Traditionally sought • May publish research to meetings with management, support asset owner/fund • May be delegated to fund now may seek governance manager stewardship manager (e.g. voting). Trend meetings with boards as part activities is to reverse this (Fiduciary of increased ESG activities Capitalism) • Voting increasingly supported by engagement with companies • Collaborative activities may be undertaken (e.g. ACSI) • Proxy advice may be sought
Pillar 3: Values-based Approaches - Incorporating values based views in the investment process - Approached through a values lens - Negative screening or investing for positive impact are two common approaches Asset Owner Fund Manager Stockbroker • May incorporate ethical • May incorporate ethical • May publish research to screens and/or offer a screens at the request of support asset dedicated sustainability the asset owner owner/fund manager option consideration of • Not typically seen as a screening and impact • Does not change the source of improved issues need for ESG integration investment outcomes • Growth in ‘Impact • Does not change the Investing’ i.e. investing need for ESG integration with a specific intention • Increasing number of to achieve a positive impact investing funds social or environmental impact
The 3 Pillars of ESG: Reflections - While they are all commonly referred to as “ESG”, each pillar is distinct - can do one without the other - Lens is important DO NOT CONFUSE! Values Lens: Investment Lens: - Values-based - ESG Integration approaches - Stewardship
The Role of Proxy Advisors The ‘Old World’ The ‘New World’ Proxy Advice Vote is Proxy outsourced to Asset Owner Asset Owner OR Vote Fund Manager vote based on Outsourced to Advice External whole of fund Fund Manager IF Fund Manager long term then close Advice investment oversight perspectives Internal Equities View Proxy Advice is now only one input that is considered.
Growing Activism By Asset Owners (Fiduciary Capitalism) 1. Growing activism Greater influence for consideration of long term issues Greater focus on ESG issues throughout the investment chain 2. Active Activist. Asset owners are a source of patient long term capital 3. Development of internal investment Asset owners developing strong in-house investment skills Strong emphasis on ESG and stewardship issues through an investment lens
How to interact with an Asset Owner Asset Owner Company Structure Through External Managers External Equities Team appoints & Management monitors External Fund Managers Growing Internal Equities Team runs Internal Board Equity Portfolio ESG/Governance Team manages ESG process integration and undertakes stewardship activities (voting & engagement) KEY QUESTIONS TO ASK: - Does the asset owner have internal management? If so who are the internal portfolio manager/analyst contacts? - Does the ESG/Governance team want a direct company relationship? If so who are the ESG/Governance contacts?
The Impact of Activists/NGO’s 1. Activists/NGO’s Pressure on asset owners to divest/engage Increasing enquiry from asset owners to companies on how issues are managed Improved reporting, transparency and practices are useful for all 2. The rise of shareholder resolutions
In summary – a checklist of ESG relationships PRIMAR PRIMARY Y – THE THE UN UNDER DERLYIN YING G RELA RELATION TIONSHIPS SHIPS THA THAT T EXIST EXIST BETWEEN BETWEEN A A COMP COMPANY ANY AND AND INVESTORS INVEST ORS Relationship Purpose Relevance of ESG Role of IR Company management with Fund For Fund Manager to get ESG issues are increasingly Co-ordinate the relationship Manager. investment insights. raised as they are believed to Historical IR ‘bread and butter’ impact investment outcomes. relationship although ESG topics are new/emerging. Company management with Fund For Fund Manager (within ESG issues are raised as they are Identify whether Asset Owner Manager within an Asset Owner Asset Owner) to get believed to impact investment has an internal Fund Manager ( the Asset Owner’s ‘internal team’). investment insights. outcomes - particularly given the long term investment horizon of If so, co-ordinate the the Asset Owner. relationship. Company Board with Governance For Asset Owner to fulfil its Governance issues are a priority Identify whether Asset Owner Team at an Asset Owner. stewardship function – i.e. – e.g. effective Board has an active governance team. to ensure the Board is functioning and remuneration adequately representing its If so, co-ordinate the interests as the beneficial E & S issues will be raised with a relationship. As this is an owner (whether the shares stewardship focus – i.e. whether emerging relationship the are held directly (internally) the company has the format, structure and timing of or via an external Fund appropriate governance around these meetings is still evolving. Manager). them to protect/enhance long term value. Identify organisations that may represent Asset Owners on governance/stewardship relationships – primarily ACSI and Regnan. Co-ordinate these relationships.
In summary – a checklist of ESG relationships SECO CONDAR ARY Y – ADDI ADDITIONAL AL INTERA RACT CTIONS THAT H HAVE VE EMERGED I D IN P PRA RACT CTICE CE Relationship Purpose Relevance of ESG Role of IR Company Board with Fund Manager. As Boards have started to get more active Governance issues – e.g. effective Board Co-ordinate the talking to investors, Fund Managers have functioning and remuneration – have relationship. As this is an started to recognise Boards as a potential become mainstream investment issues emerging relationship the source of investment insight. for Fund Managers. format, structure and timing of these meetings is Board perspective provides a cross check Other ESG issues are raised as they are still evolving. on what company management have told seen to impact investment outcomes. them. Company Board with Fund Manager As Boards have started to get more active Governance issues – e.g. effective Board Identify whether Asset within an Asset Owner (the ‘internal talking to investors, Fund Managers have functioning and remuneration – have Owner has an internal team ’). started to recognise Boards as a potential become mainstream investment issues Fund Manager. source of investment insight. for Fund Managers. If so, co-ordinate the Board perspective provides a cross check Other ESG issues are raised as they are relationship having regard on what company management have told seen to impact investment outcomes. to the logistics between them. Governance Team and internal Fund Manager The internal Fund Manager will often (i.e. determine which one attend a meeting set up between the the Asset Owner wants to Board and Governance Team because it is be the primary point of expedient to do so. contact for meetings with the Board). As this is an emerging relationship the format, structure and timing of these meetings is still evolving.
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