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ESG: Not Just Ticking Boxes

At Perennial, Environmental, Social and Governance (ESG) factors are a key consideration in investment decision-making alongside traditional investment research. In particular, we actively engage with companies in which we invest (and indeed, those that we don’t) regarding ESG matters. In particular, we actively engage with companies regarding the environmental and social impacts of their operations, as well as Corporate Governance matters. It is those companies that actively engage with us on these matters and seek to improve that we view with high esteem. This allows those companies to be viewed by us with a higher esteem. Favourable ESG performance is not simply a matter of “box ticking” or employing tokenistic measures to create the illusion of sustainable business practices.

To demonstrate our thinking, I can suggest the example of a company we have dedicated considerable amount of time enhancing our knowledge of: Integral Diagnostics (ASX:IDX).  We have strengthened our conviction in this stock from regular communication with IDX’s Key Management Personnel (KMPs) and Board of Directors. We view the company to be what we call an “engaged improver” when it comes to ESG. While the company has never been a polluter in a classic sense, nor has its operations have had serious implications for the communities in which it operates, IDX has refined its performance in sustainability over time.

A brief background

IDX provides diagnostic imaging services and is an industry leader due to its innovative technology and its highly regarded team of medical experts. Having listed on the ASX in late 2015, IDX has grown by way of both acquisitive and organic growth. IDX now operates over 50 radiology clinics across Australia and New Zealand, with a focus on hospital patients.

Affordability and access

We expect affordability and access of quality diagnostics imaging to improve for Australians as some additional diagnostic imaging services have been introduced under the MBS (Medicare Benefits Scheme). We also view consideration of diagnostic imaging as part of the MBS as a signal of its effectiveness for patients. Integral Diagnostics remaining committed to continually improving its services is indicative of their interest in enhancing the health outcomes of the wider community.

Quality of care

IDX employs a unique ownership model, enabling its specialists to be shareholders in the company. This alignment of interests ensures a high level of care and service delivered. It also has helped IDX attract some of Australia’s most highly regarded radiologists.

IDX also delivered on various milestones over FY2018, including upgrading its clinical systems, which has improved medical imaging provided. Reach of its services has also been broadened with the installation of a new wide bore MRI in Mackay.

IDX is also contributing to the detection and treatment of a broad range of prevalent medical issues with the development of the Prostate Centre for Excellence and the opening of the Spine Centre for Excellence on the Gold Coast during FY2018. With prostate cancer being one of the most prevalent types of cancer in males, we are encouraged by the role IDX could have in early detection and saving lives.

Good Governance

Governance matters. In light of the recent AGM season, we were comfortable with the resolutions put forward by the company. When speaking with various members of the Board recently we commended the use of a combination of equity-related pay incentives and short-term cash incentives for executives. These incentives related to a combination of audited financial measures and non-financial considerations such as safety, quality of service provided and innovation. The non-financial hurdles are critical in maintaining and enhancing IDX’s well-respected reputation amongst the referral community. We also endorse IDX’s Minimum Shareholding Policy, which is applicable to Non-Executive Directors, Executive Directors and other KMPs.

The Perennial Investment team also voted in favour of the Ratification of Share Issue, refreshing the company’s 15% placement capacity. IDX is still growing and access to this representing a prudent funding option for the company in the future.

IDX also made headlines in November 2017 as a result of the takeover offer it received from its smaller rival, Capitol Health. Capitol Health’s bid was rejected by IDX. Both Perennial and the Board of IDX viewed the offer as too opportunistic and detrimental to IDX shareholders, employees and patients. We had low conviction that a merged entity would deliver any material synergies. We were also concerned that senior management may have become distracted if the takeover went ahead, potentially affecting the quality of service delivered to patients.

Source: Integral Diagnostics’ website

Overall, no company starts its life as perfect. We view those that actively seek to improve their ESG outcomes as attractive investments and encourage other companies to strive to do the same. Moreover, we view IDX as a defensive investment which is appealing in a weaker economic climate.

 

This is the view of the author, Marni Lysaght, Equity Analyst. This is general in nature and does not take into account your personal circumstances.

IDX is one example of the Team’s great ESG investment ideas. Find out more about the Perennial Smaller Companies Sustainable Future Trust here.

Marni Lysaght
mll@perennial.net.au