Ausbil Active Sustainable Equity Fund, FY18 Earnings Season

Funds Management

by Jessica Amir

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Ausbil Investment Management, Head of ESG Research, Mans Carlsson-Sweeny & CIO, Head of Equities & Portfolio Manager, Ausbil Active Sustainable Equities Fund, Paul Xiradis talk sustainable business and investing for the long term.

Jessica Amir: Welcome to the Ausbil Investment Management update. Today I’m with the Executive Chairman and CIO, Paul Xiradis and Head of ESG Research, Mans Carlsson-Sweeny. Gentlemen, thanks for having us.

Mans Carlsson-Sweeny: Thank you.

Paul Xiradis: Thank you.

Jessica Amir: First up over to you Paul. Just tell us for those who don’t know, what is sustainable investing and tell us about your investment process?

Paul Xiradis: That’s a very good question to start with, because sustainable investing means different things to different people. Certainly at Ausbil here, we’ve looked at it and we’ve been looking at sustainable investing for quite sometime. And with our process here, we’ve come up with something, which we think is quite practical and pragmatic. It is very much based on our active equities process, in the sense of that’s where we do start. But what we’ve done is taken it one step further, where we have really refined the universe, eliminated a number of stocks and sectors. And also stocks, which we think, just don’t cut it from an ESG perspective and then optimise the portfolio, going forward.

Jessica Amir: Maybe you can tell us why fossil fuels and mineral extraction isn’t classed as controversial?

Paul Xiradis: There’s no doubt there is some controversial components to mineral extraction and also particularly, fossil fuels. And we’ve taken again a fairly pragmatic approach to that, where we have eliminated a number of stocks, because they’re just very much focusing on coal extraction, as an example. We do believe that you need to take a transitory approach, in the sense you need to be encouraging and investing in companies, which are looking to improve their carbon footprint over time. And certainly that’s the way that we’ve approached it.

With mineral extraction, I think that again we tend to invest only in the leaders who are very responsible, in the way that they extract the minerals. And also how they make good the environment thereafter as well. In addition though, we will be looking for opportunities particularly in the renewable space. At the moment, there isn’t too many opportunities as we speak, but certainly we’ll be actively looking for those opportunities. Also we have tilted the portfolio as much as we can to the gas space, where we think that is certainly the place to be, as far as fossil fuels are concerned.

Jessica Amir: Thanks Paul, now Mans over to you. In regards to ESG, what are some of the key takeaways from reporting season?

Mans Carlsson-Sweeny: We’ve got an ESG research team that sits within the investment team. We produce proprietary to do research. So what that means is we look at a company, purely from an ESG perspective and we rate companies, so the company has an ESG score. We also pay a lot of attention to a company’s trajectory in ESG. So ESG direction we call that, so it could be a positive, neutral or negative. We think that is a good lead indicator for operational performance.

In the reporting season there were a number of things of course, but one of them I think was a general improvement of health and safety. Quite a few companies improved on that, examples include Independence Group (ASX:IGO) and Brambles Limited (ASX:BXB). We also paid a lot of attention to cultural factors and staff engagement, because we think that could also be a lead indicator for productivity. And other improvers I guess in the reporting season, would have been Woolworths Group (ASX:WOW) and Santos Limited (ASX:STO).

There were quite a few companies that deteriorated as well. So we had eight downgrades in ESG scores and about 15 per cent of the companies covered, actually have negative ESG direction. And that’s often for cultural factors as well and falling staff engagement. That was very prevalent in the financial sector, in the wake of the Royal Commission.

Jessica Amir: Now can you give us an introduction to modern slavery and what’s happening at the Government level, in terms of legislation?

Mans Carlsson-Sweeny: Slavery is a very complex issue. In 2016, we issued an investor statement on slavery highlighting the risk slavery means for investors. And also what we want companies to do to mitigate those risks. So slavery is actually more prevalent today than it’s ever been in human history. In 2017, the Government announced the intention to have a Modern Slavery Act, based on the one in the UK, which has been operational for a couple of years. And in September this year, it passed the Lower House and we expect it to pass the Senate in the next (few months) or before Christmas at least.

So the devil’s in the detail, but essentially any organisation with $100 million in revenue or more per year, needs to outline, a) what are the risks of slavery in our supply chain’s operations, b) what actions are being taken to mitigate those risks, and c) how effective have those actions been?

Jessica Amir: Now Mans, I believe you’ve recently returned from Asia. What took you there and what were the key takeaways?

Mans Carlsson-Sweeny: To understand a company’s ESG profile, I think you need to understand its entire supply chain. So I’ve been to China and Bangladesh in the past and also most recently, I went to Cambodia to see the latest developments there. So labour rights for us in terms of importance as an investor, comes straight back to our investment philosophy. At the end of the day, a company’s business model, if it relies on underpaid workers or weak regulation on social issues, we don’t think current earnings are going to be sustainable.

When you go on a field trip like this you only get to see the best factories, you never get to see the worst factories, because they know you’re coming. But that can have value too, because you can learn what’s industry best practice. You can take that information with you and use that when you engage with companies, here in Australia. So at the end of the day, we want companies here to adopt what we think is industry best practice. That makes for resilient companies and as investors we prefer stable earnings.

Jessica Amir: Thanks Mans, back to you Paul. Now touching on the Ausbil Active Sustainable Equity Fund, what are your largest positions?

Paul Xiradis: We have a number of large positions, BHP Billiton Limited (ASX:BHP) very much features in our portfolio, CSL Limited (ASX:CSL) would be another. Westpac Banking Corp (ASX:WBC) in the banking side would be a substantial position for us. And Santos as well is a substantial position within the portfolio. Now each one of those stocks are actually leaders in their particular fields. So BHP for instance is one of the highest ranked in our eyes, from an ESG perspective. CSL is probably one of the best-managed companies in Australia and again, is also ranked incredibly highly. In fact one of the highest ratings that we have actually assigned, to any company in Australia.

Westpac is a leader in its field, certainly there has been some issues surrounding the banking enquiry. But on a relative basis, Westpac is ranked the highest. And Santos is one that we have been working with and have a substantial position in for some time, where we have been able to engage with the company. They have been listening and they have also been taking corrective steps, so they have been improving their ESG profile.

Jessica Amir: And lastly, how has the fund performed?

Paul Xiradis: We are very pleased with the performance of this particular fund since launch, which was launched in the beginning of February. The performance has been 140 basis points over and above that of the benchmark.

Jessica Amir: Paul Xiradis, Mans Carlsson-Sweeny, thanks so much for the introduction to sustainable investing. And I’m Jessica Amir. Thanks for tuning into the Finance News Network.