Longtime ESG research specialist shares thoughts on the future of investing

I have always been passionate about environmental and social issues. For example, before joining AMP Capital I was an environmental consultant working with companies to help them understand and manage their environmental and social issues. In that role, I worked with investment banks and lawyers as part of merger and acquisition due diligence and IPO's and so I gained some understanding about how the finance sector thought about ESG issues. In that role I also started to work on climate change issues and even then, which is over 20 years ago, I could see the transformational change needed to address the problem of climate change.

In addition, while doing an MBA I could see the importance of ESG issues for the successful execution of a strategy and ultimately create value.

Fortunately the model AMP Capital had for developing their Sustainable Investment funds included a dedicated internal ESG investment research team and setting up that team and working on investment funds enabled me to bring my previous passion and expertise together.

There are four things which I would recommend for people looking to get into ESG investing. You need: 1) a passion for environmental and social issues and resilience to work for change 2) a desire to constructively challenge the conventional wisdom to enable you to engage with companies and drive change within the organisation you work, 3) an understanding of how companies create (and destroy) value and 4) be prepared to be able to answer, what I call, the "So What?" question, or how does my ESG insight lead to a tangible investment insight.

The last of these is the most challenging.

There are three key criteria I use when identifying opportunities to influence a company on an ESG issue:

1. do I believe that the company management and board are open to change or influence,
2. can I articulate a good business reason for why the ESG issue is important and why they should change, and
3. can I articulate a desired outcome and give constructive guidance on what actions might assist the company to achieve the desired outcome.

One of the aspects that attracted me to be part of the Chronos Sustainability network is their history of having a similar approach, for example through their work on farm animal welfare.

One of the reason I founded the Investor Group on Climate Change (IGCC) over 15 years ago was the need I saw for the bar to be raised across the entire investment community on their understanding and management of climate change and to provide an avenue for the investment community to contribute collectively to climate change policy. I am glad to see that the IGCC continues to raise the bar.

I am also on the Coordinating Working Group of the Australian Standard Finance initiative and part of its remit is to identify ways in which the finance sector can make a real difference through addressing climate change, and supporting the achievement of the Sustainable Development Goals and the Sendai Cooperation Initiative for Disaster Risk Reduction.

One of the reasons I wanted to be part of the Chronos Sustainability expert network was its focus on making a real difference to the way in which investors invest and its ambitions for raising standards across the investment community as a whole. There are many examples which illustrate this commitment but to draw on two.

First, Chronos has worked with Brunel Pension Partnership, a major UK asset owner, to develop and implement its climate change policy, where the central objective of that policy is to systematically change the investment industry to ensure that it is fit for purpose for a world where temperature rise needs to be kept to well below 2°C compared to pre-industrial levels.

Second, Chronos has on behalf of the European Institutional Investors Group on Climate Change - the sister group to the IGCC - led the development of guidance for institutional investors on managing the risks and opportunities presented by physical climate change, and will be working with IIGCC to support the roll-out of that guidance.

The opportunity to develop and deliver these kinds of initiatives for APAC is not only appealing but necessary to drive change.

For me, "sustainable investing" is an umbrella term for investing where you have a clearly articulated social and/or environmental objective and clearly articulated financial risk/return objectives. It covers a spectrum of investments from ethical investment where the ESG focus is on excluding certain sectors or companies, to investing with a comprehensive ESG engagement agenda, to thematic investments through to impact investing where there is a clear intentionality to invest in a positive environmental or social outcome which can be clearly demonstrated, preferably in a quantitative way.

Sometimes, the term is used for the integration of ESG into investment decision making. I don't call that sustainable investing - that is just good investment practice.

I don't think there are major differences in ESG investing between regions but there are important nuances between regions reflecting the history of ESG investing, cultural characteristics of the region and the structure of the investment market.

The history and structure of our superannuation industry in Australia has and will continue to provide an opportunity for meaningful investment in real assets which support social and sustainable infrastructure and property. The cultural characteristics and structure also support constructive engagement between investors and listed Australian companies and finally there is an increasing appetite for asset owners to allocate to impact investments in listed markets.

There are a couple of areas that require looking outside of Australia to identify sufficient investment opportunities. These are listed equity impact investing and private equity impact investing. Fortunately the private equity impact investment opportunities are developing quickly in Australia.

At least initially, the global economy will be less connected when we get out of the current circumstances. In part, this was happening anyway with some countries becoming more nationalistic but the COVID-19 pandemic will make companies review the resilience of their supply chains and countries their critical material risks, e.g. medicines, both of which are likely to lead to the global economy becoming less connected. The initial reaction may well be an overreaction and there is likely to be a trend back to global connectedness.

I don't think the finance sector will be any less connected and, in some respects the different government policies in response to the COVID-19 pandemic may lead to more capital seeking arbitrage opportunities between countries.