Despite being a growing reservoir of funds under management, this critically important pool of capital is confronting mounting problems collating and disseminating key data in a timely manner.
The ratings house is pinning its growth strategy on a revamped methodology that increases the emphasis on governance to 25 per cent – a timely move considering APRA’s proposed reforms.
How to avoid the pitfalls in ESG investing
Parametric, the global implementation specialist manager, has put the icing on the cake for ESG investing with its latest research. The white paper not only shows there is little-or-no loss to returns from embracing ESG; it also offers up some tips for returns enhancement through the process.
Visiting Australia to speak with clients this week, Jennifer Sireklove, the Seattle-based director of responsible investing for Parametric, says that from her firm’s work she perceives the short-term impact of adopting ESG strategies as “neutral” to a portfolio’s overall performance. The broader benefits, for both the investor and society as a whole, however, can be very significant.
The research paper, ‘Responsible Investing in a Peer Sensitive World’, which was co-authored by Australia’s head of research for Parametric, Raewyn Williams, suggests five reasons for investors to take on board ESG strategies, if they wish, and how they can optimise the risk/return relationship. They are:
- Returns. The statistics show that, overall, ESG does not have a material impact on returns. Many of the indices which have been developed to cater for ESG factors are time sensitive. But over long periods, it is clear ESG is not negative and is probably positive for returns.
- Optimisation. A carefully constructed portfolio which considers ESG factors can replace problematic stocks, such as tobacco or dirty coal producers, with others that have similar risk/return characteristics.
- Active ownership. Investors can get more involved with their investee companies, at least voting at meetings or at most telling the boards and management what they should be doing for sustainability. Parametric, for instance, always votes its shares for clients that allow it to do so.
- Substitute return sources. There are many ways funds can enhance returns through fee reductions, tax efficiency, transaction cost management and having downside protection, and
- Investment choice. The choice options which most big funds offer allow strategies which are not peer-assessed on the regular charts. Quoting APRA figures, the paper says that 58.53 per cent of APRA-regulated super goes into investor choice funds (primarily because of the big retail funds where more members exercise their choice options).
Williams says that there is another benefit from ESG investing which is that, as an industry which gets tax concessions, it is good to be able to show the Government that superannuation is playing an important role in things such as infrastructure investments, getting people involved in their retirement solutions and generally supporting social goods.
Sireklove said from Seattle last week that her firm did not have a view on whether clients included ESG or any other factors in their investment strategies. “We have a strong view, however, on what’s the best way to implement their strategies.”
With ESG, for instance, if funds wish Parametric will take a fund’s exclusions or inclusions, and try to build a portfolio which closely matches the performance of the index, such as the ASX 300 or MSCI ACWI.
