How CPM enables better ESG strategies

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Portfolio construction and processing efficiencies are important. It’s not just about getting after-tax optimum returns. There are other benefits, such as how a big fund can enhance its sustainable returns, using ESG principles.

According to Jennifer Sireklove, a managing director and head of investment strategy at Parametric, the US-based global implementation specialist manager, central portfolio management (CPM) has become “an enabler” in making sure an entire portfolio is adhering to the ESG principles of the asset owner.

“Our clients are increasingly asking how they can deal with an issue such as carbon, controversial weapons or tobacco,” she said on a visit to Australia last week. Chris Briant, the Parametric Australia country head, said this was an increasingly asked question. “Because CPM pools all the portfolios of the clients’ managers to maximise efficient after-tax trading, we can also track and, if directed, amend the total portfolios’ exposure to things such as ESG principles and carbon.”

The recurring themes within ESG, Sireklove says, include: climate change; what has become known as ‘modern slavery’, which is now subject to Australian law; and, gender parity. “For most people, it is a shock to hear about certain worker conditions [to do with ‘modern slavery’]including children. There is no country where this is acceptable, and it tends to happen more often in certain sectors and there are some countries where it is more common than others,” she says.

The carbon debate in the US, for instance, goes back to about 2014. It has developed into a more sophisticated discussion that “just screening”. Sireklove says: “Climate action is now more about engagement… When we heard of the [US presidential] election results in 2016, a lot of big investors felt they had to take matters in their own hands.”

Apart from ESG, Sireklove is also a specialist manager in the emerging markets space. Parametric’s “standard” emerging markets strategy invests in 43 countries, versus 20 in the MSCI index. Chris Briant says this reflects the firm’s broader reach than many other managers.

“We have always expanded beyond the index [in emerging markets], Sireklove says. “And we also end up with some underweight positions against big benchmark positions. It’s all about the growth structure in the fundamental investments.”

Briant said Parametric was seeing greater interest in emerging markets, notwithstanding the trade war between the US and China. A lot of the discussions, too, had to do with active versus passive. In emerging markets, the passive side of the argument tended to be boosted because of capacity issues and higher costs in active management, he said.

A CPM process engages each fund manager used, say, by a big super fund, and centralises their trades to maximise efficiencies and boost after-tax returns. . Parametric has more than $9 billion invested in this way by Australian funds, which is up from $2 billion five years ago.

– G.B.

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