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ESG & Sustainability: The 2020 journey and our 2021 focus

Reading Time: 4 minutes

2020 was a challenging year for the globe and its 7.8 billion population.

Locally in Australia, 105 Queensland roads were closed due to flooding1 in January. In February, New South Wales had the heaviest floods in almost 20 years2 and by March 2020, there was 46 million acres of fire damage from what has been termed the “Black Summer”3. This has a devastating impact to communities through fatalities, damaged homes, lost tourism, destruction of ecosystems and wildlife and significant economical cost of repair.  There were over $4bn of insurance payouts from these events and other hailstorms over this period.

This was followed by the global Coronavirus pandemic, an unprecedented event which at the time of writing has resulted in 96.1 million cases worldwide and tragically resulted in 2.05 million deaths4.

In Australia, we have experienced ‘lockdowns’ to reduce the spread of the disease, particularly in New South Wales and Victoria, which contributed to almost a million jobs lost5 and an economy in recession. Those able to work from home had to manage home schooling, limited face-to-face social interaction and uncertainty. Essential workers continued to perform their job, reliant on the practices of their employer to keep them safe. Many employees accepted pay cuts or reduced hours as businesses attempted to manage the financial impact of the pandemic. A$34 billion was withdrawn from the Australian early access superannuation scheme reducing retirement balances for 2.8 million people6. Global supply chains were interrupted and the restrictions on international travel prevented factory audits and visits, increasing the risk of modern slavery in the supply chain.

The events of 2020 have been negative in many ways and have touched the lives of us all. However, one positive we can take away has been the increased attention of ESG & sustainability.

A proliferation of environmental, social and governance issues has been highlighted as a result of the extreme climatic environment and social inequalities that have surfaced in the past 12 months. This has captured the attention of regulators, governments, businesses and the public and trickled through to how we should be investing our money. We have seen a surge in interest in ESG & sustainable funds as much of society has formed stronger views about which businesses and industries they want to support with their capital. ESG or sustainable inflows stepped up to ~15% of total investment flows over 20207. There is also increasing evidence that there is no performance trade off when investing in a sustainable way, and in some cases, a focus on sustainability has enhanced returns.

At Perennial, we expect ESG & sustainability is going to continue to be a driver for companies and investment in 2021. Particularly pertinent is climate change and the Paris Agreement, modern slavery in supply chains, and cyber security risk and management.

A changing climate

Extreme climate anomalies have correlated with the rise in atmospheric carbon emissions since the industrial revolution. To reduce the risks associated with intensified weather patterns, it is critical that the globe meets the targets of the Paris Agreement to keep global temperature rises well below 2 degrees. To do this, we must have net zero emissions by 2050. During January, the United States rejoined the Paris Agreement under the Biden government which signals that climate change is a priority. During 2021 we will be encouraging companies to commit to net zero emissions by 2050 but will monitor manager accountability to the targets including the short, medium and long progress steps; TCFD reporting; and emissions disclosure including the measurement and reporting of scope 3 emissions.  A key focus of the Better Future Strategies is to invest in renewable energy providers and companies that are providing solutions or developing technology that can assist in reducing emissions.   At the time of writing these companies include Meridan Energy, Mercury Energy, New Energy Solar, Calix, Alpha HPA and EROAD.

A modern issue

Slavery has not yet been eliminated from the globe. In fact, 40 million people live in modern slavery today8. This includes those in forced labour, child labour, debt bondage, early marriage and human trafficking. The Modern Slavery Act 2018 (Cth) is an important step for Australian companies to map modern slavery risks in operations. The global pandemic has put more workers at risk with limited access to factories for site visits and audits, concerns on COVID-safe working conditions and an increase of 71 million people in extreme poverty in 20209 deepening worker vulnerability. Perennial has supported the investor statement on modern slavery, human trafficking and labour exploitation as a signatory to the Investors Against Slavery and Trafficking Asia Pacific group. We will use both collaborative and individual engagement with Australian corporations in the hopes of identifying, monitoring and assisting companies at risk of modern slavery in their supply chain.

A cyber risk

An area of ESG that is not commonly discussed but is extremely important in the context of increased cyber-attacks, shift to working from home and greater digital penetration. In June, Prime Minster Scott Morrison made a press announcement on details of Australia being the subject of cyber security attacks from a “sophisticated, state-based actor” and announced that federal spending on cyber security will increase to over $1.67bn in the coming decade. A number of ASX companies have been subject to cyber-attacks with some having material business disruptions and financial consequence. We have a preference for companies with sound cyber infrastructure who take an active approach to cyber risks rather than a detection-and-response approach.

We engage with companies on how they manage their ESG risks as we find that companies that are managing ESG risks and opportunities well are typically also doing a good job of managing opportunities and risks in other parts of their business.  These companies are likely to demonstrate better earnings outcomes and stronger returns for shareholders over time.

This effect is likely to be magnified as more funds integrate ESG even further into their investment process as investors become more conscious of how their funds are being invested.    Investors are realising that providing capital to companies that are doing good things for the environment and society and to withholding capital from those who aren’t is a “win-win” – it produces better outcomes for society as well as better returns.

Invest for a Better Future.

Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial. This article does not take into account your investment objectives, particular needs or financial situation.

  1. RACQ Twitter page
  7. Morningstar & Morgan Stanley Equity Research data