Ausbil Investment Management on ESG integration

Funds Management

by Carolyn Herbert

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Transcription of Finance News Network Interview with Ausbil Investment Management Head of ESG Research, Mans Carlsson-Sweeny

Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from Ausbil to discuss environmental, social & corporate governance is Head of ESG Research, Mans Carlsson-Sweeny. Mans welcome to FNN.

Mans Carlsson-Sweeny: Thanks for having me.

Carolyn Herbert: Mans, can you start by telling us what is ESG and how has it evolved over time?

Mans Carlsson-Sweeny: Response to investment has evolved a fair bit in the last decades. So it started out with ethical investments, which is where investors are excluding companies or entire sectors, based on their moral beliefs. So for instance, a negative screen on alcohol and tobacco companies. Then came a social responsible investment, so SRI, which is where investors are trying to seek out companies doing the right thing. And then came ESG integration and sustainable investment, so integration of environmental social and governance factors.

So whilst an ethical investor might want to screen out companies based on their personal beliefs, they might be happy to forfeit returns. With the ESG integration, what they’re really trying to do is capture all the risks and opportunities and therefore, maximise returns.

Carolyn Herbert: In your experience, why is ESG so important?

Mans Carlsson-Sweeny: I think the importance of ESG integration really comes down to better-informed investment decisions, which can then drive better results. So if you look at the average listed company, the majority of that company’s value comes from intangible drivers, which are things you don’t necessarily find in a financial statement. So examples that includes for instance is a company’s culture, its corporate governance, its supplier and customer relationships.

So it’s important for us as analysts, to analysis how companies are managing their intangible drivers. And in doing so, we make better-informed investment decisions and we can avoid some of the corporate blow-ups we’ve seen in recent years. We can also assess a company’s earnings sustainability. So in short, we can make better-informed investment decisions.

Carolyn Herbert: What needs to be done better when it comes to implementing ESG policies?

Mans Carlsson-Sweeny: We spend a fair bit of time engaging with companies, both their Boards and management. And those engagements can be on a wider range of issues, not just corporate governance and executive remuneration, but a lot of ESG issues too. And one such issue has been supply chain management, and that’s really important for a number of reasons. First, this comes back to labour rights and human rights in the supply chain.

First of all, the company’s brand is its key asset and then sometimes a brand can be equivalent, to a high proportion of a company’s market cap. The brand is sensitive. If something goes wrong, it’s very time consuming and very costly for companies to restore that brand, once the trust has been broken. The other thing is human rights and labour rights issues in the supply chain can also be associated with business risks and production disruption.

And a third thing is, I think you can tell something about the company’s management, by the way they deal with their suppliers. So if a company three years after the Rana Plaza building collapse in Bangladesh, is still paying lip service to ethical sourcing; that tells us something about the management quality. And management quality for us is a key important factor for when we make our investment decisions.

Carolyn Herbert: How does Ausbil integrate ESG factors into its investment decisions?

Mans Carlsson-Sweeny: We try to avoid concept stocks and stocks that have un-assessable earnings. And prefer to invest in companies with sustainable earnings and quality management, and ESG can play a big part in that analysis. So we use a four-stage approach. First macro-economic analysis, followed by sectorial analysis, stock selection and portfolio construction, so ESG can be a part of that, all four stages. But the magnitude of course, depends on which company and which industry.

We don’t buy off-the-shelf ESG research, so we have our own ESG research team in-house. A dedicated team that produces proprietary ESG research, which we think can give us unique insights. Because often with these ESG issues, they can be complex, we need to dig deep into that and do detective work. And then, the ESG research we do is an integrated investment decision-making process.

Carolyn Herbert: What would you say are the most pressing ESG issues occupying companies today?

Mans Carlsson-Sweeny: There’re quite a few issues and some of them are emerging. But I think climate change is one of the number one - probably the number one issue facing Australia and Australia’s companies. So first we have regulatory risk. Australia signed up to the Paris deal and there’s going to be some regulatory changes coming out of that. The second one of course is physical climate change risk, so more extreme weather events and how that’s going to impact companies.

The third one is food safety. So you’ve got Australia’s economy transitioning from being mining based to export and food, for instance. The Australian brand is very highly regarded in Southeast Asia, but it doesn’t take much to change that attitude. I think any supply chain hiccups, in terms of food safety or food quality, can have some major impacts. It’s very important that when we invest in companies in our industry that we look at, how they manage their food safety.

Another one I think is human rights and labour rights in the supply chain. I think consumers are increasingly aware of where their goods are being manufactured, and consumers can be very unforgiving. And unforgiving in the sense that it takes a very long time and it’s costly for companies to restore their brands, once they get damaged. Another issue I think is cyber security. When you talk to banks, it’s very clear that there’s a major threat to the banks and the same thing with data privacy. So there’re a lot of emerging issues coming up as well.

Carolyn Herbert: Finally Mans to recap, how does ESG apply to portfolio construction?

Mans Carlsson-Sweeny: I think ESG as a tool can be very useful to find downside risk, it can even in short stocks on the ESG ground. So sometimes you might find a short-term catalyst based on that environmental or social risk, whether corporate governance risks. The other thing with the ESG you can assess a company’s earnings sustainability. So if a company’s earnings rely on underpaid labour for instance, under-priced pollution etc., or maybe earnings aren’t sustainable in the long-term. So for us ESG can be a really good tool to find, or to assess a company’s earnings quality, its management quality and also earnings sustainability, which are key parts of our investment decision-making process.

Carolyn Herbert: Mans Carlsson-Sweeny thanks for the update.

Mans Carlsson-Sweeny: It was my pleasure.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.