Why supporting our world means supporting our investments
It’s important that our members’ investments are managed in a sustainable and responsible way, but investing is really only part of the equation.
At Colonial First State, we know our members are more conscious than ever about the impacts that environmental, social and governance (ESG) factors can have on investments, and of the important role that financial institutions like ours play in generating positive social, environmental and economic impact for the world around us. So, what’s our team doing about it?
Hear from Executive Manager Guneet Rana, Senior Manager Caroline Paterson, Analyst Morgan Gallop, and Senior Manager Fiona Harding-Jones about how they’re working to better align the team’s responsible investment processes with members’ expectations and identify new opportunities for the future.
I have a background in investing that spans more than twenty years. Over that time, I’ve experienced different market conditions, management styles and strategies for each of the investment asset classes, and have used that knowledge to help create investment portfolios. I think having such a deep understanding of the industry means I’m up to the challenge of looking at our investments with that additional responsible investment lens. We believe that good investment management of climate and ESG risks across our portfolios and active ownership – that is, engaging with the investment managers we’ve chosen, understanding their approach to these risks, and ensuring they engage with the companies they’re invested in on our behalf – could help improve the potential long-term performance of companies and also lead to better long-term returns for our members.
I’ve been working in the field of investing and research communications and have been with Colonial First State for more than 20 years, so I have a good sense of how the organisation has evolved over time. For me, it’s a privilege to help our members, even in a small way, to achieve the retirement they’ve worked hard for. Investing for superannuation is for the long term, so it makes sense to approach investing with a long-term view – and this involves considering what the future will look like. The work we’re doing means we can positively contribute towards a more sustainable future – one that the children of today can enjoy when they retire.
I’ve also been working with Colonial First State since the early days, focused largely on research and analysis for the Investments team. I’ve found that there are a lot of great opportunities in the responsible investment space for those that have the interest and would like to make a difference. Although I’ve worked in funds management for many years, the opportunity I had to move into this particular space was exciting. There are many ways to positively influence the evolution of investment portfolios and, if done well, I think this could result in strong performance.
I was drawn to responsible investment due to my background in climate change environmental science and corporate social responsibility. My role involves analysing ESG and climate risk data for our entire platform of investments. This provides our portfolio managers with insight into what’s happening with our investments and supports their recommendations to the investment managers of our portfolios on how ESG risks could be considered as part of the decision-making process.
I’ll let the team explain in more depth, but there are a few big projects we’re working on at the moment that we’re excited to share and will update members on over time – namely, proxy voting and engagement, modern slavery, and climate risk analysis.
My focus is on proxy voting and engagement. On the voting side, we’re determining whether our chosen investment managers or a third-party engagement provider should be responsible for shareholder voting for the companies our portfolios may be invested in. On the engagement side, several of our investment managers have what are called ‘active ownership’ programs in place. This involves them working with companies on specific issues or towards a pre-defined goal – for example, putting in place a carbon emissions target. It’s also important for us to be across any potential controversial issues relevant to the portfolios of our investment managers. Through our work, we aim to understand how our investment managers consider these issues in their own investment processes.
As for our climate risk project, we’re currently analysing climate change data and climate risks in our investment portfolios. We’re also looking into working with providers who can provide scenario testing, which means proposing different climate scenarios and understanding how they might impact the investments in our portfolios. This will help inform our approach to climate change, and support our conversations with the investment managers we’ve chosen for our portfolios.
Modern slavery is a particular focus area for me. What we’re in the process of doing is assessing the global effects of modern slavery and also measuring any potential impacts that our investments may be having. We’re also working to better communicate our disclosure and stance on ethical and responsible investing, and more clearly define what those commonly used terms mean to us as an organisation. In turn, we can further evolve the education of both our team and our members so they can better understand the responsible investment space and our approach to it.
Different risks have emerged over time that can expose members in different ways – whether that’s climate risk, the risk associated with poor governance among corporations or, as we’re experiencing with Coronavirus, social risk. In the current environment, existing risks have become much wider spread. But they all remain equally important long-term factors that have the potential to impact investment returns. So we’re engaging with our investment managers to understand how they’re addressing these risks in our portfolios and how this could impact our members.
At the moment, one of the biggest risks is Coronavirus – at least, that’s what markets are all thinking about. But I also think the pandemic represents one of the biggest opportunities for us. For instance, some investment managers are reflecting on the impacts Coronavirus has had on financial markets and returns, and are talking about their plans to build a more sustainable way of managing investments. This could be at least one positive thing that comes out of such a difficult time.
There are so many initiatives going on in the responsible investment space at this time that it’s important for us to determine our priorities. We now have a well-resourced team, so our goal is to do the research that we need to do and mitigate key responsible investment risks relevant to our funds. Like Caroline, I also see some risks as opportunities – particularly those that help us to identify which companies (that is, which investments) could benefit from the transformation of the world economy into a more sustainable one and which companies will not.
I’d say social risks currently pose the biggest threat to investing. To expand, we’re obviously seeing the more immediate social threat of Coronavirus, which is driving companies to address changes to their financial viability and consider what these changes mean to employees and communities. But we’re also seeing ongoing, longer-term social risks – like modern slavery, which has an impact on people, as well as climate change, which can have material impacts on the physical world and operating environment of companies who produce investment returns. This poses questions like, will there be mass human migration out of equatorial regions, are cities adapting for a future with higher populations, and how might all of this impact companies in the future?
I think one of the key features of our team’s approach is integration. We apply our process to all portfolios, whereas if you dig deeper, you might find that some of our peers only do this selectively – for example, by calling out only one fund to which they apply a responsible investment lens. That’s because we believe that in communicating our responsible investment approach, we should also stand by those beliefs and actively demonstrate them across the board.
Yes, as Caroline mentioned, you can see how we’ve enforced exclusions for investments in companies associated with tobacco and controversial weapons producers across the entire product suite – not just one fund or asset class. It can be important to have a consistent approach.
The Responsible Investment team is very passionate about being able to make a difference. It’s an exciting time. We have the resources, knowledge and skills required to position our portfolios appropriately, while also focusing on the end goal – that is, to ensure that the long-term returns of our funds continue to perform in line with our investment objectives.
While we’re early on in our progress, I’m proud that the consideration of climate change and ESG risks is no longer just a box-ticking exercise as it has been for the industry in the past. With more analytics available to us than ever before, we’re able to adopt best practice in ESG integration across the business – making it a fully integrated process that we’re applying to our team’s understanding, investment manager selection and, by extension, to all of our investments.