Over recent years, there has been a growing trend to emphasise the importance of Environmental, Social and Governance (ESG) aspects of shares held in investment portfolios. We have observed an increased level of awareness across our membership base, irrespective of age or gender. This article briefly describes the history of ESG implementation and our approach to helping clients understand their needs and options.
The Evolution of ESG Implementation
The most basic ESG implementation taken by investment managers, prevalent in the early days, was to invest as they always had but to eliminate a handful of shares from the portfolio. This is often referred to as ‘negative screening’ because the manager is simply screening out certain shares, usually based on the industry. This approach, whilst concrete, must be taken with care. One downside of this approach is that removing too many shares from a portfolio’s investment universe could lead to lower returns. Negative screens are the most basic form of implementing ESG. We would question however, if it is sufficient.
An evolution of ESG implementation is to incorporate ESG criteria (such as applying thresholds or considering health and safety issues) into investment decisions. This recognises the grey areas rather than taking a binary view. For example, a company may be doing business in an industry you, as an investor, are not happy with. But the question needs to be how much business do they do – is it their entire business, or is it incidental? Are they gradually moving away from this business, are they trying to improve it, or are they determined to plough on regardless?
Determining whether the company has crossed your “line in the sand” is seldom easy and the reality is that most companies are at least receptive to dialogue about improving their performance. Of course, that dialogue would be trivial unless the companies know that the investor is serious. To back up that seriousness, fund managers can abstain or vote against resolutions at annual general meetings. Combined with legal reform (the ‘two strikes’ law in Australia, for example) it’s our belief that dialogue is ultimately more likely to lead to change than simply excluding a company from the portfolio.
A further iteration of ESG implementation is thematic exposure. This describes a portfolio where there is a conscious decision to focus on investing in sectors related to sustainability. This may involve a range of sectors – be that renewable energy, or companies that make affordable hygiene products targeted at poorer areas of the world.
ESG on Our Platform
Our model portfolios are not marketed or described as ‘ESG’. However, we do believe in incorporating ESG considerations into our portfolio composition options. To that end, we’ve implemented the following ESG aspects into our investment platform framework:
- All our fund managers have signed on to the UN’s Principles for Responsible Investment, and we monitor how they have voted in annual general meetings.
- We have no exposure to certain market sectors, such as asbestos, fur or controversial weapons.
- We have carefully curated a small number of ESG funds. These have been made available to our members as standalone investments.
Given the diverse membership we have, our view is that it is preferable to consider ESG without making it the fulcrum of your investment approach. Still, we are constantly monitoring developments that will enable our clients to ensure that their ESG values are appropriately reflected in their investment portfolios while maintaining a vigilant focus on their performance targets.
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Disclaimer: Ifsinvest is a division of Legg Mason Asset Management Australia Limited (Legg Mason Australia), ABN 76 004 835 849, AFSL No. 240827. Legg Mason Australia is part of Franklin Resources, Inc. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances.