By Sara Dix, Policy Manager (Global Markets & Investment), FSC
As Australia’s $2.7 trillion pool of managed fund capital grows, it is becoming increasingly more important to consider ESG factors. This is for several reasons; on the one hand there is increased scrutiny from consumers but it is also important in exercising fiduciary duty through improved risk management and a longer term focus to the benefit of super beneficiaries.
Superannuation members will generally hold investments for around 40 years. Long term investing requires a longer term risk management approach and better protection of assets. This shouldn’t be based on short term share prices or purely financial data, but longer term assessments of the performance of a company as a whole.
Fiduciary duties and ESG integration go hand in hand. Super funds in Australia are governed by the SIS Act which enshrines in legislation that trustees must perform their duties in the best interests of the beneficiaries. There has been some debate about whether integrating ESG allows trustees to fulfil this obligation. However we strongly believe that the two work together, in fact, ESG factors can have a significant impact on member’s returns.
There is a general consensus in the market and in the law community that ESG investing is consistent with fiduciary duty. This covers the need to preserve and grow assets for the future retirement outcomes of all Australians as our population ages. A focus on ESG factors, to some extent, allows an escape from short-termism.
A 2015 UBS report, ‘A revolution in equity investing,’ takes a deeper dive into non-financial data and notes that 80% of the market value of the largest 500 listed companies in the US is generated by intangible assets including brand, reputation, customer satisfaction and environmental performance.
The report says sustainable investing is an investment approach that is now moving towards identifying outperforming companies using extended nonfinancial data and the shift towards evaluating intangible assets.
The business and public policy case for ESG has never been stronger.
Although they often come into play in analysis of long-term risk, ESG is not necessarily about ethical decisions. It is an incorrect assumption too that implementing ESG factors in investment analysis automatically inhibits returns – in fact, a growing body of research suggests the opposite is true. ESG analysis should be seen as a risk management overlay that helps professional portfolio managers make more informed investment decisions. ESG analysis doesn’t have to result in complete portfolio overhaul; oftentimes it brings small changes to portfolios, alongside heightened company engagement.
As asset owners and asset managers, the industry has a responsibility to ensure the companies they invest in are operating in an optimal manner and in the best interests of investors or members. The FSC’s advocacy for public policy reform aims to promote responsible business practices and improve corporate governance and disclosure on a whole of industry level.
As Blackrock notes in its 21st century engagement paper, “unlike company-specific engagement, public policy engagement has the potential to extend company best practices to an entire industry and to establish uniform standards.”
The FSC sets standards for our members as industry best practice. In terms of ESG, these include our superannuation governance standard and our proxy voting standard.
Our Superannuation Governance Standard was released in 2013 and is now mandatory for FSC members. This aims to promote best practice in the industry and focusses on MySuper products, as around 80% of Australians are estimated to be invested in a default fund.
The Standard includes sections on an ESG Risk Management Policy, as well as sections on Corporate Governance, Proxy Voting and Diversity.
The Standard guides members as to how to approach the development and implementation of an ESG policy. And includes a template policy which may followed and disclosed publicly.
The FSC Proxy Voting Standard has been in place since 2004 and underwent a significant redraft in 2013.A key revision to the standard was to the voting record disclosure requirement. The Voting Record disclosure now requires reporting on a resolution by resolution basis (rather than aggregated resolution). That is, an operator must disclose its voting record on a “per scheme, per investment and per resolution” basis.
FSC fund manager members must disclose their approved Voting Policy on 1 July each year and their voting record within three months of the end of the financial year.
Similarly In the US – the SEC mandates all institutional investors must vote on all resolutions and disclose these votes.
We think this standard is a significant step forward and is best practice globally for fund managers.
The FSC will continue to promote ESG investing and educate the market on the strong evidence base for responsible investing. This includes enforcing our best practice standards.
Where to now?
As ESG investing grows in importance and popularity, the industry must take a leadership position in best practice and thought leadership.
The modern investor is changing the landscape for fund managers and super funds. Asset managers and asset owners must keep up or risk being left behind.
As the stewards of a pool of $2.7 trillion dollars, we have a responsibility to all Australians to ensure we take a long term focus and responsible investing practices on a whole of industry level.
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