As an active manager, engagement with ASX listed corporates is a critical component of our strategy. Analysts and portfolio managers typically meet with the management teams of companies in our portfolio multiple times a year to discuss both financial and non-financial metrics. Discussing the business with company executives, board members and other staff provides us with insight into management competency, strategic direction of the business and the operational execution of the firm. It ultimately leads to better performance for our investors.
Each year, we release our Sustainable Future Survey report where we invite ASX listed corporates to share their views about how they are considering sustainability and Environmental, Social and Governance (ESG) factors. In our 2020 survey, 90% of surveyed corporates agreed that engaging with investors on ESG & sustainability is beneficial to their business and 80% agreed that they had experienced positive business outcomes as a result of focusing on sustainability & ESG.
Given this, we use engagement to discuss material ESG issues in our Sustainable Future Strategies (and in other funds more broadly). Engagement on sustainability topics provides the opportunity to:
- Assess ESG risks and opportunities;
- Address controversies;
- Determine if management is being authentic in the company’s approach to sustainability; and
- Help to improve the outcomes of the business by sharing ESG ideas and industry best practice.
ESG related controversies are arising more frequently and having an impact on stock performance. We have seen a number of examples in the press recently including RIO and the blasting of Juukan Gorge, AMP and overcharging customers and Cleanaway and cultural concerns.
To minimise the ESG controversies in our portfolio, we look for red flags. We believe it is a significant red flag when companies are unwilling to engage or improve their ESG & sustainability outcomes. We will seek to avoid investing in these companies.
When ESG issues arise for holdings in our portfolio, the first step is to engage with the company. This allows the assessment of the underlying cause and surrounding circumstances, the response from management and the strategy going forward to prevent ongoing issues.
If we are unsatisfied with the response, we have several tools at our disposal as active managers, including:
- We can reduce our holdings in the company to minimise the risk through partial selling of the position.
- Divesting our holdings if we perceive the risk to remain ongoing.
- If divesting or selling would not lead to a beneficial outcome for our clients, we may use our proxy voting power to influence change by voting against management at the AGM.
Alternatively, if we engage and feel that management has taken adequate steps to address the issue, we may decide to continue to hold it in the portfolio and closely monitor the risk.
Importantly, in our Sustainable Future Strategies, we do not hold companies in industries we believe are at risk of disruption like coal, oil and gas and gambling. This is because we do not have the power to change their business models, no matter how engaged we are with the company.
On the other side, we have had engagements over the past 12 months that have resulted in positive change to the company.
- We encouraged an industrial solutions technology company to appoint a female non-executive director to the board given the benefits a diverse board has on company performance. The company subsequently appointed a well-qualified female to the board.
- We discussed remuneration best practice with an educational platform provider at last year’s AGM. Pleasingly, the company has improved the remuneration structure this year with more meaningful targets.
Given our focus on sustainability and reputation in the market, ASX listed corporates often approach us to discuss ESG & sustainability. We have met with a number of companies in the past 12 months, some which are in our portfolio and others which are not, to provide our expertise on ESG risks & opportunities, disclosure and best practice. We believe that we have a role to play in driving the industry to become more sustainable.
If you are looking for a fund manager that will invest in companies that are solving global sustainability challenges and will engage with ASX listed corporates to get the best outcomes for your portfolio, you should consider the Perennial Smaller Companies Sustainable Future Trust or the ASX quoted ETF, eInvest Future Impact Small Caps Fund (Managed Fund) (ASX: IMPQ).
Disclaimer: While the information contained in this article has been prepared with all reasonable care, Perennial accepts no responsibility or liability for any errors, omissions or misstatements however caused. This article is not personal advice and does not take into account your investment objectives, financial situation or needs.
Perennial Investment Management Limited is the responsible entity for the funds mentioned in this article. Potential investors should consider the product disclosure statements of the funds mentioned in this article before deciding whether to invest, or continue to invest, in the funds. The product disclosure statements and more can be found on Our Trusts page.