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.
Why ESG should be integrated in traditional stock analysis
(Pictured: Rob Wilson)
by Greg Bright
Investment analysts are a quirky bunch. I’ve always thought they are a bit like journalists: inherently sceptical. So, when MFS Investment Management, the Boston-based global manager, hired its first full-time ESG specialist last year, it decided to go with someone who had a traditional analyst’s background.
Rob Wilson, who was in Australia last week, spent six years as an equity analyst for a US-centric manager before taking on the job at MFS. He says he was always interested in ‘stewardship’ and using all the resources available to investors to their highest value. “That’s the goal of capitalism,” he says. “Analysts should be sceptical. And ESG factors are naturally aligned with our investment process as long-term investors.”
He says his role is to work with the analysts – hence being able to understand where they come from – to see how ESG factors may impact on two things: financial statements and the valuations of the companies MFS is invested in.
On a daily basis, this means working one-on-one with the analysts over specific issues, doing cross sector or thematic research and providing ESG ‘dashboards’ for the analysts to use. While MFS has about 14 per cent of its funds under management subject to various exclusion mandates, such as not investing in tobacco stocks, that is not what Wilson focuses on. His role is much more about the integration of ESG analysis from the point of view of risk management, obviously, and also maximizing long-term returns.
“When I started the job I thought it would be mainly about risk management,” he says. “But there’s a surprising balance between risk and return… We always try to integrate any factor in our research.”
As an example, Wilson has looked at the well-publicised issue of tax minimisation through what the Americans call ‘inversion’, which is changing a company’s domicile to a lower-taxed place. “I regarded this as a social issue,” he says. “It’s effectively a negative externality. We looked at some very specific numbers on the companies and this helped us engage in discussions with them. It resulted both in some sell-down in weightings, and analysts adjusting their projections.” This has also allowed the analysts to identify alpha opportunities from successful inversions.
MFS set up a responsible investing management committee in 2009, initially to look at whether it should sign up to the UNPRI principles, which it did in 2010. From the work of that committee it thought it needed a full-time person to oversee ESG throughout the firm and “put a finer point on the work”, Wilson says.
The ‘G’ in ‘ESG’ is now universally accepted as enhancing a company’s performance. The ‘E’, too, is clearly a thematic potential enhancement which occasionally goes for short-term runs, such as the clean-tech mini-bubble a few of years ago. The ‘S’, however, doesn’t get much airplay.
Wilson says that apart from tax minimisation by multi-nationals, which is in the news in Australia as well as the US, there are many examples of social issues which may impact on long-term returns. Income inequality, for instance, has the potential for creating major macro risk through political change.
Wilson says there is still a lingering debate within the funds management industry whereby some people still assume there’s a trade-off between profitability and societal value. “Part of my job is to show that that is not accurate.” He has prepared presentations based on business theory, hard data on corporate sustainability and various case studies.
Another ESG issue in the news at the moment is carbon constraints or divestments. This is not a simple issue. For instance, Wilson says, even if you divest of high-carbon-producing stocks, what do you do then? There are many variables at play and you need to come back to what are the material risks.
The divestment debate, led in the US by the big endowment funds and in Australia by some industry and university funds, prompted an internal debate at MFS which posed the question: “is this a picture of the future world?”
A bonus from such debates is that the analysts – those sceptical folk – have had better discussions with the management of the companies they invest in. “They [company management] appreciate that we are thoughtful long-term investors,” Wilson says.
