For super funds and their advisers

New ESG report indicates climate change progress

David Sheasby

Martin Currie, the global equities manager, has published a new report on ESG issues, which will become a regular publication, complementing the firm’s other papers and client notes related to the subject. The first edition is focused primarily on climate change, which a majority of clients have said is their main long-term worry in the space. Believe it or not, the news is not quite as bad as it was a few years ago. There is progress. Fund managers have a big part to play.

Julian Ide, Martin Currie chief executive, says in his introduction to the new report, called ‘Stewardship Matters’, “The company’s mission statement is ‘Investing to Improve Lives’.” Stewardship Matters, which gathers information and views from portfolio managers across the company, allows Martin Currie to report back to clients on the outcomes of the “critically important stewardship and ESG activities that our investment teams are undertaking on their behalf”.

Ide said: “Stewardship Matters is also an opportunity for us to share with our clients how we use our global investment reach to lead on ESG issues and are continually evolving our investment approach to make better informed decisions for a more sustainable future.”

The report complements firm’s ‘Stewardship’ annual report, which has won several industry awards in recent years. While the annual report, published in April, mainly focussed on how Martin Currie is handling the issues relating to governance and its ESG principles, the new report is more client centric. Key themes from the new report include:

  • Despite the physical barriers imposed by the global lockdown, we have continued our extensive engagement and voting activities over the past six months.
  • Ongoing ESG innovation has resulted from collaboration across the investment teams: Continued refinement of proprietary ESG scoring; mapping of UN Sustainable Development Goals (SDGs); launch of the Australia Sustainability Equity strategy; and, the establishment of ‘Carbon Value-at-Risk’ (CVaR) modelling
  • COVID-19 has led to increased intensity on ESG from clients – climate change continues to be dominant theme, and
  • Martin Currie showcases its investment team’s sector and regional insights on the potential risks and opportunities from climate change.

A key to the progress with climate change and other ESG issues is increasingly seen as fund manager engagement with their investee companies. It is an investment version of the old saying: “Don’t throw the baby out with the bathwater”. This is particularly relevant for Australian equities, where Martin Currie has shone for some time and has a lot of influence over companies, but also for global and emerging markets investee stocks. For broad portfolios it is no longer good enough, using another old saying, to do the “Wall Street Walk”, by simply selling out of every company which offends on some grounds. Australian resources companies, such as coal, are trying to pivot to sustainable energy production. They should be guided and supported in their transition.

David Sheasby, Martin Currie’s head of stewardship and ESG and the report’s lead author, says the COVID-19 crisis has clearly been the dominant topic on all investor’s minds this year. “As such, we are frequently being asked by clients if the impact of the pandemic has changed our approach to stewardship and ESG,” he says. “The reality is that we have not actually needed to change or expand our engagement in response to the pandemic. This is because our sustainability and ESG-related work is already fully integrated into every stage of our investment process. While we cannot travel to meet with investee companies and stakeholders in person, we have not stopped our intense focus on generating positive ESG outcomes from our engagement activities”.

He says: “Interestingly, one thing that we are finding is that with all the social distancing and reduced travel occurring worldwide, there has been more availability and willingness from management and boards of our investee companies to engage with us on broader ESG issues than ever before. This is one aspect that has been really encouraging during the COVID-19 period and we hope it continues.”

A recent example of the positive impact of the firm’s ongoing engagement is from the Martin Currie Australia team in Melbourne. On behalf of their retirees, charities and foundations clients they reached out to the chairs of companies in which the firm invests in Australia and New Zealand for its income strategies, emphasising that if a company has reasonable cashflow and a sound financial position, dividends should be paid despite COVID-19.

“The team has received encouraging feedback from boards, many of whom have taken the request on board. For example, ANZ, in explaining why they would pay an interim dividend, noted that many of the bank’s shareholders were retirees who were heavily dependent on dividend income,” Sheasby said.

“A key thing that has changed… is the level of intensity we are seeing from clients around their focus on ESG. The pandemic has been a catalyst for greater scrutiny from clients on the way that asset managers invest on their behalf, to ensure this meets their expectations. They are asking for more hard evidence to support the broad ESG statements managers make regarding their investment process. Investors are being more proactive than ever before and we see that continuing post the pandemic. And, although the COVID-19 pandemic has shifted the focus for our clients somewhat, we have observed that climate change has continued to be the dominant theme for them within the ESG space,” he said.

“More than ever, clients want to understand how we are approaching climate change in our portfolios, how we identify the risks and the potential opportunities. We are receiving an increasing number of requests for portfolio carbon footprints, scenario analysis on climate-related risks, and ESG questionnaires that include climate change questions, as well as client requests for modified portfolios which exclude high fossil fuel producing companies.”

Martin Currie is expecting a bigger focus on decarbonization and opportunities to be part of the transition to a lower-carbon economy going forward. Elsewhere, cyber security and data privacy are also becoming key topics as the world becomes more digitalised, especially as the working-from-home trend continues. The global accord towards adopting the United Nations’ ‘Sustainable Development Goals’ also continue to be a key topic.

Martin Currie is building out an extensive piece of work, which started within its emerging markets team and will be rolled out across the firm. The aim of the work is to map company products and activities to the specific targets that underpin the 17 UN SDGs. “We are looking at the extent that companies in the private sector are able to contribute solutions to some of these goals. The results of this work will help us to develop strong ongoing relationships with investee companies on SDG-related issues. By helping to guide our investee companies towards more sustainable business practices, this then leads to long-term value for our clients,” Sheasby says.

The report makes an interesting observation surrounding a concern that not many super funds would have thought about, which is a recent global development, hinging on a new US Securities and Exchange Commission regulation, to do with proxy voting. Martin Currie says: “The main target of the SEC’s overhaul is proxy advisor firms themselves, but the ruling also provided guidance for investment managers, who will now be expected to wait to cast their votes until after they have given the issuer a chance to respond to the proxy advisor’s recommendation. We are concerned that this ruling could undermine the independence of proxy advice and could prolong the voting process. We are in the process of reviewing our own proxy voting procedures to identify any adjustments that we may need to make on the back of this change.”

– G.B.

Note: Martin Currie is a sponsor of Investor Strategy News. Views expressed here are those of the author and not necessarily those of Martin Currie.

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