VICTORIA GEDDES, Executive Director.
The relentless push towards the adoption of Environmental, Social and Governance (ESG) reporting by companies across the globe appears to be gaining momentum. As entire populations have gone into hibernation in an effort to contain the spread of the coronavirus, the topic of greatest interest in the global investment community is whether ESG funds would be able to outperform in this environment. As quarterly performance numbers were released earlier this month, we may have got the answer.
Data released by Rainmaker, tracking the performance of Australian funds, identified that ESG funds returned on average 1 per cent more than general balanced or growth fund options in the quarter ended March 30. Over the 12-month period, four of the top-five balanced personal options were ESG funds, as were four of the top-five retirement balanced options.
In the US some of the biggest investment funds set up with ESG criteria outperformed the broader market with a report released by Blackrock concluding that in the first quarter of 2020, 94 per cent of a globally-representative selection of widely-analysed sustainable indices outperformed their parent benchmarks. Deutsche Bank’s annual Alternative Investment Survey earlier in the year noted that ESG factors now shape the allocation decisions of almost two-thirds (60 per cent) of hedge fund investors.
The fallout in equity markets as a result of the pandemic is perhaps the tipping point for ESG as investors, in seeking to rebalance their portfolios amid the turmoil, are now increasingly turning to sustainable funds over more traditional ones. Sustainable funds in the United States set a record for inflows in the first quarter of 2020 attracting around US$40.5 billion in new assets during Q1, a 41% increase year-over-year.
Sustainability’s Secret Sauce
The reasons why companies that are managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions are widely debated. In Blackrock’s view it was likely to be as much about the ‘S’ and the ‘G’ as a bias to environmental factors. Characteristics such as employee satisfaction, the strength of customer relations, and board effectiveness are seen as important indicators of culture and mindset. It is postulated that management teams that place importance on a range of stakeholder groups and actively consider how their business might impact third parties, encourages a more holistic view of how they operate in the world. This in turn makes companies better prepared for shocks such as COVID-19.
Where to Begin on the ESG Journey
Our analysis of the level of ESG reporting by companies in the ASX300 suggests that most are still in the early stages of embracing this new way of reporting. Around one third of the top 100 produce a standalone report with another 30 companies out of the remainder also publishing details of their performance against ESG metrics.
Across the remaining ASX 300 companies a further 30% include a section on ESG or Sustainability in their annual report. As with our annual review of companies embracing ‘Same Day Reporting’ for the publication of their annual reports, tracking the evolution of ESG reporting in Australia is a project we are committed to continuing to report on.
For companies that are just starting the somewhat daunting task of integrating ESG reporting into their work flows, a good first step is a review of the main reporting frameworks that companies globally reference when deciding what to include and where to focus their attention.
The Standard Setters
There are four organisations globally that have established frameworks which are generally acknowledged as setting the standard for ESG reporting.
- Global Reporting Initiative (GRI)
- Task-Force on Climate-related Financial Disclosures (TCFD)
- United Nations Global Compact
- Sustainable Accounting Standards Board (SASB)
In Australia GRI and TCFD are the frameworks most commonly acknowledged by those who are already reporting. GRI has been promoting its approach for over 20 years and is the most widely used corporate responsibility reporting framework globally.
Each of these organisations approaches the question of what to report on and how best to promote a collective commitment to corporate sustainability differently. In next month’s newsletter we will take a closer look at the origins of each reporting framework, how they differ and who, amongst Australian corporates, have adopted them. One thing, however, is clear – the accumulation of standardised sets of data on ESG issues is an essential step in promoting the transparency, integrity and big picture thinking needed to effect a change that all will embrace.