Head of Environment, Social and Governance (ESG)
Q&A with Katie Beith, Forsyth Barr’s new Head of ESG
Happy New Year, it is great to be here and thanks to the Summer team for inviting me to contribute this article in a question and answer format as part of their commitment to investor education. There has been a huge amount of talk about ESG and investment over the last few years so I will try to help unravel some of the confusion that surrounds the industry.
Let’s start with, exactly, what is ESG investing?
ESG stands for Environmental, Social, and Governance. ESG encompasses a very broad set of issues, from the carbon profile of a company, to how it manages and looks after its employees, to corruption prevention and responsible tax management.
It is an evolution of Socially Responsible Investing (SRI) – an investment strategy that seeks financial returns while also aligning with personal values and paying attention to this wider set of ESG data and information which can help us make better and more informed investment decisions.
Let us unpack the carbon profile of a company to bring this to life. Investors now look at the physical and transition risks a company may face from climate change including, for example, changing consumer demand patterns, regulatory and technology risk, the pathway it is on as the economy decarbonises (is it ahead of the game or a laggard compared to its peers) and board level accountability for positioning the company for a net zero future. Assessing these issues can help inform an investor's view on a company and whether it is valued accurately now and into the future.
Why is there so much demand for ESG products at the moment?
There are a couple of reasons. First, there is a recognition that you cannot have a healthy economy without a healthy environment. There is growing awareness of just how interlinked these aspects are. Second, assessing ESG issues provides a way for people to know that they are investing their money in a manner that considers the environment and society and is not creating further harm. Third, it can provide a way to allocate capital towards solutions for sustainability related challenges the world is facing. And finally, in my opinion, it just makes good sense to look at, assess ESG factors and understand their investment implications as, I believe without a doubt, they can affect the performance of a company and portfolio.
Do I need to sacrifice returns if I want to invest in an ESG product?
I believe the answer here is no. ESG investing seeks to identify additional risks and opportunities that may be at play and help investors make more informed decisions. Like every investment strategy there are risks. But, investors in the oil and gas, coal, tobacco, and the defence industries firmly recognise that a thorough understanding of ESG issues surrounding these industries is paramount. Those who have correctly identified where risks were under-priced, have avoided some pitfalls. But as we all know, past performance is not a reflection of the future. One thing that is for certain is that the future will be different. We are seeing unprecedented environmental change and there is a large unknown component for how this will play out in the future. Looking at ESG issues, helps us to consider that future.
What is greenwashing and should I be worried about it?
Companies and investors are greenwashing if they are giving the impression that their products are more environmentally friendly than they really are. Given the speed and scale with which money has moved into ESG products over the recent years, I think there is reason to be concerned. However, when you look under the hood, there are a number of indicators that can help you quickly identify whether you believe there is greenwashing at play. First of all, sustainability claims should be backed up with targets, action plans, measurement and transparency reports. Sustainability should be at the heart of a business strategy, not a bolt on after thought at the end of the report. There should be strong governance and clear lines of accountability. And data, where possible, should be externally verified. These sorts of indicators really help you assess and work out who is serious about this.
What is a net zero economy and do you think the world can become net zero by 2050? Is this relevant for my KiwiSaver fund?
Net zero refers to a state in which the greenhouse gases (GHGs) going into the atmosphere are balanced by gases being removed. It is important because — for CO2 at least — this is the state at which global warming stops. The Intergovernmental Panel on Climate Change (IPCC) has concluded the need for net zero CO2 by 2050 for temperatures to remain consistent within 1.5C. And most countries have agreed to work towards this as part of the Paris Agreement in 2015. However, to meet this goal, GHG emissions must halve over the next decade, falling 7% every year through 2030. Last year, 2020, this was achieved, but it took the first global pandemic in over 100 years to achieve it. This demonstrates just how considerable the required action is for every year out to 2030 and beyond.
The International Energy Agency has detailed a pathway for us to get there that requires ”nothing less than a complete transformation of how we produce, transport and consume energy”. It is the magnitude of this change that is the reason why your KiwiSaver fund should be thinking about the impact of the transition and the companies it chooses to invest in, on your behalf.
We have a vision of what needs to be done and a roadmap to get there. Now it is up to each and every one of us, as individuals, companies and governments to do what we can to ensure we get there.
Read more about SRI in relation to Summer here.
If you are a Summer member and interested in learning a bit more about how investors think about climate change, you can login and read our recent report Spotlight on climate change: Closing the gap between rhetoric and action.
You might like to discuss the views in this article with a financial adviser. Please call them directly or toll free on 0800 11 55 66.
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