Excluding fossil fuels from Ausbil's Active Sustainable Equity Fund

Funds Management

by Melissa Darmawan

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Ausbil’s Active Sustainable Equity Fund Portfolio Manager Nicholas Condoleon and Ausbil Investment Management's Head of ESG Research Måns Carlsson talk about the composition of the fund, the exclusion of fossil fuels, returns and themes in ESG investing and the 3 year anniversary.

Melissa Darmawan:
Hello, I'm Melissa Darmawan for the Finance News Network. Joining me from Ausbil Investment Management is fund manager, Nicholas Condoleon, and head of ESG research, Mans Carlsson. Nick, Mans, welcome to you both.

Nicholas Condoleon: Thank you.

Mans Carlsson: Thank you.

Melissa Darmawan: Nick, first question. Congratulations on reaching your three-year mark for the Ausbil Active Sustainable Fund. How has it performed over this time?

Nicholas Condoleon: Look, we've been very happy with the performance of the fund over the last three years. Over calendar year 2020, the fund outperformed the ASX 200 by 14.7%, delivering a net annual return to investors of 16.1%, Over the last 3 years, the fund outperformed the ASX200 on average by 4.8%, delivering an annual return, net annual return, to investors of 11.8%.

Melissa Darmawan: Thank you. The fund excludes fossil fuels from its investment universe. Why is that? Mans, your view?

Mans Carlsson: Yeah, I mean the United Nations calls climate change a defining issue of our time, and for us investors, it's a multifaceted issue. You have physical climate change risk. You have a regulatory risk, you have transition risks, technology change, but ultimately, it comes down to the Paris Agreement. So, 2015, the world decided to sign up to the Paris Agreement, which effectively wants to limit global warming to below two degrees compared to pre-industrial levels. So, the science is very clear. There's a limited amount of fossil fuels we can afford to burn between now and 2050 and the world is moving towards de-carbonization. We've seen more and more countries and also companies make more commitments on climate change. For instance, China has announced that they want to be net carbon zero or net zero carbon by 2060. And as we've seen, the new US Government takes climate change very seriously as well. So, that's the background behind it. And in effect, it means avoiding companies that have material direct or indirect exposure to fossil fuels, but also, of course, it means seeking out companies where things stand to benefit from the increased de-carbonization because it's accelerating.

Melissa Darmawan: How about you, Nick?

Nicholas Condoleon: Look, the scientific thinking and the social discussion around fossil fuels and the impact on climate change has really evolved quite significantly over just the last few years. And we've seen that drive a notable shift in government policy as well around the world. From a portfolio perspective, the fund has also evolved. We continue to look for opportunities in companies which produce raw materials which are used in things like batteries to power electric vehicles. And that obviously helps the world move to a low-carbon form of our transport.

Melissa Darmawan: Thank you, Nick. Mans, can you please describe some of the ESG issues and what progress has been made, starting off with modern slavery?

Mans Carlsson: Yeah. Look, 2020 was a very busy in terms of ESG. We saw a number of ESG trends, which we think will continue into 2021. We also saw a number of ESG-related events that destroyed shareholder value. And the number of trends think will continue in 2021. Climate change, which we talked about before is obviously one of them. But we do think modern slavery and human rights is a big topic for 2021. I'm going to explain why.

Before COVID-19, it was estimated that more than 40 million people around the world were trapped in forced labor and other types of modern slavery. Of course, then came COVID. And that made more and more people more vulnerable to exploitation in the supply chains, and from an investment perspective, this means two things. It means brand risk for the companies we invest in, but also it comes down to earning sustainability risk, because if a company's business model relies on underpaid workers or illegal activities like slavery, that's not going to produce sustainable earnings over time. And we've done a lot of engagements with both companies and the Australian Government on the Modern Slavery Act, and it's something we'll continue in 2021. And I think it will all come to a head in 2021 because the Modern Slavery Act in Australia has mandatory reporting requirements for companies to detail the risk of modern slavery in their supply chains and operations. So, 2021 will be a big year for that, I think.

Melissa Darmawan: How about indigenous relations?

Mans Carlsson: Yes. I mean, one of the big catalysts for change there was Rio Tinto's blasting of the cave, 46,000-year-old cave at Juukan Gorge in the Pilbara in 2020. I think that was a major wake-up call for the whole investment industry. And it's really important for us investors to understand how companies are managing their relationships with traditional owners, because that affects the licensed operator. And that's something we'll continue to engage with in 2021.

Melissa Darmawan: Governance and culture?

Mans Carlsson: Yes, we saw a number of incidents in 2020 where cultural factors destroyed shareholder value, and that's something we want to avoid. So, for us to assess culture in the companies we invest in is very important. We do our own proprietary ESG research, and we've got our ways to understand how companies are performing on culture, particularly on staff engagement, but also things like diversity, et cetera. So, it's a big topic and it's something we'll continue to assess and monitor in 2021.

Melissa Darmawan: And cyber-security? 

Mans Carlsson: Yes, cybersecurity. We saw a number of attacks in 2020, and we think it's something that will continue in 2021 as well. And a lot of the companies we've spoken to have told us that the number of attempted attacks has risen as well, and that's across a wide range of different industries.

Melissa Darmawan: Thank you, Mans. Last question to you, Nick. How have you positioned the fund for sustainable investment themes?

Nicholas Condoleon: Sure. So, at Ausbil, we've been integrating in-house proprietary ESG research into our bottom-up fundamental stock analysis for over a decade now, which really allows us to, we think, keep ahead of industry trends and manage risk, most importantly, and exploit opportunities in the marketplace to deliver outperformance to our clients.

Melissa Darmawan: Nicholas Condoleon, Mans Carlsson, congratulations on your three-year anniversary in the fund and the recent exclusion of fossil fuels from the fund also.

Mans Carlsson: Thank you.


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