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ESG now a vital business consideration

Glenn Freeman  |  13 Jan 2020Text size  Decrease  Increase  |  
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As Australia’s small business sector calls for more action to reduce the risks from disasters such as bushfires, we look back at how ESG is now a vital business consideration.

The National Disaster Risk Reduction Framework was published in 2018, following a summit of more than 100 participants.

It notes that disasters are becoming more frequent and intense, and are affecting more people.

The framework estimates an annual economic cost from disasters of at least $39 billion by 2050, a figure that does not include the effects of a changing climate.

But 18 months on from the initial framework, an implementation plan has not been published.

"We have a plan to adapt to climate change - let's use it," Council of Small Business chief executive Peter Strong says.

"We need the National Disaster Risk Reduction Framework implemented now."
Prime Minister Scott Morrison told the ABC on Sunday the report had not collected dust on a shelf.

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He said the last federal budget included $130 million to establish the framework and emergency services ministers had discussed it in June.

"They're working with local governments to put this in place."

Meanwhile, Morrison is working on a cabinet submission for a royal commission into the bushfires.

ESG investing gaining momentum

For some time, there has been growing recognition of the importance of environmental, social and governance principles within parts of the financial services industry.

Back when the National Disaster Risk Reduction Framework was published Morningstar.com.au spoke with the head of an ESG-focused fund manager, John Streur from Calvert Research and Management.

Calvert is one of the few professional stock-picking firms that specialises in selecting only non-ESG compliant companies for its investment portfolios.

Streur acknowledged that ESG investing has shifted from being something of a peripheral area to a core area of focus for many companies.

"I think ESG has really transformed from a niche consideration that a few fund managers thought about, to something that is relevant to all investment decisions," he said.

"The reason that it's really transformed is because operating companies around the world, small companies and large multinational corporations, are dealing with the environmental impacts of their companies as well as the social outcomes that their companies are creating."

Companies are increasingly viewing ESG principles as an opportunity to differentiate themselves as employers, competitors and sellers of products and services.

Within the investment management sphere, he notes there are a few firms that are completely focused on analysing companies this way, and using the information to produce competitive results.

But there are many more that have tried to add an ESG sleeve to their existing asset management business, with varying degrees of success.

"I think it's very hard for an organisation to split itself and have a team of people doing this amazing innovative work, and then to have other people who are dealing with the old way of doing things," Streur said.

"And so, we find the ability to focus 100 per cent of our time and energy on this innovative approach to be very attractive, and we think it's hard to do a little of this within the context of a bigger organisation"

What about costs?

ESG investing has traditionally struggled with the perception that it is more expensive, which has been something of a turn-off for investors.

Streur concedes it's a research-intensive approach, that also often means a greater level of corporate engagement to the table: "There is a lot more to ESG investing than there is to non-ESG investing".

But he pointed to data from Morningstar US, which provides research on some of Calvert's funds, that shows they rank below the median management expense ratio.

"So, today, I think that the reality is that an ESG manager or a responsible investment manager, like Calvert or like anybody in this space, needs to look at the competition as the mainstream investment houses," Streur said.

"Our clients want competitive performance. They also want to make the world a better place and deal with these ESG risks and they expect to pay the same price as everybody else."

is senior editor for Morningstar Australia

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