ESG investing 2.0 emerges

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The second iteration of environmental, social and governance investing will require a stronger level of authenticity, accountability and focus on tangible outcomes, according to sustainability experts.

A significant shift is taking place in the world of ESG investing, Financial Standard’s Best Practice Forum on ESG heard this morning, as investors urge companies to up the ante.

Presenting virtually, Perennial Value Management portfolio manager Damian Cottier said the first iteration of ESG investing is transitioning to version 2.0, otherwise known as “better future investing”.

The second iteration is more focused on authenticity in terms of outcomes produced by ESG investing, as well as harnessing the tail winds that come with it, he said.

Version 1.0 in some ways focused on ‘bad companies’ in the portfolio being excluded based on relatively high negative screens

“But going forward, we think that there is going to be a lot more authenticity around negative screens. There will also be more [incorporation] of the concept of net-zero alignment with companies that are typically weeded out through negative screens,” he said.

Additionally, version 2.0 will have more focus on positive outcomes and active engagement with companies.

Cottier set out to dispel the misconception that the ASX is full of companies that are solely focused on resources and financial services.

There are companies on the ASX with interesting growth prospects in global markets, he said.

Some examples are Felix Pharmaceuticals and Immutep, which have an innovative approach to detecting and treating cancer, and Janison, which conducts assessments and exams online.

“There are companies that are reducing the carbon impact production processes in the case of Calix and Alpha HPA. Those companies assist people with motor neuron disease and help them communicate,” he said.

Perennial ESG and equities analyst Emilie O’Neill, who presented alongside Cottier, said the public took a keen interest in ESG investing, particularly over the past two years thanks to several triggers.

“Starting locally in Australia, it really kicked off with what we call the Black Summer bushfire event in New South Wales and Victoria and led to 46 million acres of fire damage, followed by some of the worst floods we’ve seen in some time,” she said.

Another trigger was the coronavirus pandemic, which brings up many ESG issues like equal access to healthcare and vaccinations, and worker safety.

Overseas, China, Japan and South Korea made a commitment to reduce emissions in late 2020, while the US re-signed the Paris Agreement last January.

The United Nations Climate Change Conference or COP26, which takes place this month, will also accelerate more action towards signing up to the Paris Agreement.

“All of these triggers have resulted in significant inflows into sustainable ESG investment funds … We also know that 33% of global equity inflows this year have gone into ESG funds and now one in eight in equity funds are labelled easy investment products,” she said.

O’Neill points out that Europe and China are estimated to spend about $350 to $550 billion per annum to be on track for net zero.

“And we know that public funding is unlikely to be enough to support this and there will be a need for private spending and investment,” she said.

“That means if you’re not currently investing sustainably, you’re likely going to be in the minority very shortly.”