The Inside Investor – Lisa Uhlman
While some still associate them with lower returns, ESG analysis and sustainable investing are really about managing risk and harnessing opportunities, the Perennial Partners portfolio managers said. If done “authentically”, sustainable investing is “very much a returns game”.
Despite the growing importance of ESG, sustainable and ethical investing, misconceptions still abound about these approaches, all of which have a place in portfolios. Among the toughest myths, according to one fund manager, is to dispel is the “entirely incorrect” assumption of a sustainability performance trade-off.
Speaking to investors on Tuesday, Perennial Better Future portfolio manager Damian Cottier (pictured, right) noted that ESG (environmental, social and governance) analysis, sustainable investing and ethical investing are all different, and are as much about managing risk and harnessing opportunities as they are about helping to shape a better future.
“Sustainable investment for us is very much a returns game, and you can do that well if investing authentically,” Cottier said. He pointed to “fundamental global drivers” acting as tailwinds for companies working to solve sustainability challenges, including companies on the ASX.
Emilie O’Neill (pictured, left) – co-head of ESG and equities analyst at the sustainable fund manager, which is part of the Perennial Partners investment group – agreed that the urgency around decarbonisation and energy transition create “really large opportunities” for companies working toward solutions.
“Small, innovative businesses have a huge role to play in a sustainable and low-carbon economy,” she said. “This provides us with some really interesting investment opportunities.”
O’Neill and Cottier, along with Perennial Better Future head of institutional and retail business development George Whiting, were discussing the sustainable investments driving outperformance in Australian small- and mid-caps, and ways to incorporate these “nuanced” investment strategies into portfolios.
Doing so, they said, can improve investors’ returns while providing defensive ballast and protecting against risk.
“There are some people who still associate ESG investing with lower returns, which is quite an outdated misconception which dates back to faith-based investing,” O’Neill said.
“The sustainable investment industry has really moved a long way since those misconceptions were formed, and there is no performance trade-off for ESG or investing in a sustainable way,” she added. “In fact, there is evidence to suggest that ESG can yield better returns than mainstream investment funds.”
Companies with strong ESG credentials are likely to have positive business outcomes, with evidence of higher returns and profits of lower cost of capital for firms that do well on ESG and sustainability, she said. That leads to higher valuations, lower risk and less downside volatility.
In addition to misconceptions like the perceived performance trade-off, investors are often still confused about what ESG, sustainable and ethical investing mean. Cottier was clear the three play different roles, all of which are important for portfolio strength.
“ESG analysis is purely about managing nonfinancial risks within a company – it’s a tool used in conjunction with traditional research to identify risks that may have a material impact on a company’s share price,” he said. “It doesn’t tell an investor what to invest in or preclude them from investing in anything – it is simply using more information to make a more informed investment decision.”
Sustainable investing is “more about harnessing opportunity” – avoiding headwinds and taking advantage of tailwinds, Cottier explained. He pointed to areas like health care, renewable energy, low-carbon technologies, education and companies working to improve social outcomes.
ESG analysis, he noted, provides an “interesting lens” through which to view companies, particularly small-caps, and how they manage risk and think about opportunity. “What we find is that companies that are doing good things and looking to improve on the ESG/sustainability front when we engage with them, typically they’re doing good things in other parts of their business as well.”
O’Neill agreed that ESG analysis and sustainable investing work together toward positive outcomes while protecting returns.
“There’s a lot of upside to be made from the technologies and solutions that will help our economy decarbonise – things like renewable energy providers, carbon capture and storage, energy efficiency or circular-economy plays. And we want to stay away from companies that have a business model that may be disrupted or that have reputational risk.”
Ultimately, they said, it’s just about common-sense investing: managing portfolio risk, avoiding headwinds and investing in stocks that appear to have tailwinds going forward.
“ESG is an analysis tool used to identify nonfinancial risks, and sustainable investment is about harnessing global opportunities,” Whiting said. “There are some wonderful, innovative smaller companies on the Australian market that are solving sustainability challenges and tapping into those tailwinds.”
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