06 March 2017

The rise of ESG for investor analysis

Are you communicating effectively for your investors to meet their obligations around ESG (Environmental, Social and Governance) analysis?

Institutional investors are increasingly considering the importance of ESG factors in constructing their portfolios. Factors such as climate change, population growth and demographic shifts have a material impact on long-term portfolio performance and are now being built into the decision-making processes for portfolio construction.

A new roadmap, Fiduciary Duty in the 21st Century, was recently published by PRI, UNEP FI and The Generation Foundation, following consultation with investors, policymakers and lawyers. The roadmap outlines the importance of sustainability for the long-term success of a business and therefore the obligation for fiduciaries to consider these factors in their decision making processes.

The roadmap emphasises how integrating ESG issues into investment research and processes will allow investors to make better decisions and improve performance in line with their fiduciary duties. Consideration of ESG factors in analysis provides a greater assessment of risks and opportunities associated with particular investments.

The growing recognition by fund managers that ESG issues need to be accounted for is being driven by a number of factors, including the Establishment of the ASX Corporate Governance Council and The Australian Council of Superannuation Investors (ACSI). ASCI was established by a number of superannuation funds and industry bodies to develop guidelines for superannuation funds on ESG issues and to establish corporate governance principles for Australian-listed companies. 
With Australia having one of the largest pension markets in the world, this represents a powerful force for change. Willis Towers Watson values Australia’s pension assets at US$1.48 trillion as of end of 2015.

Given this changing landscape for investor analysis, it is more important than ever for Australian companies to be communicating effectively on all aspects of their operations, from financial to environmental, social and governance.

Sustainability Reporting has historically been viewed as optional, meeting the needs of a select number of stakeholder groups. This view is now changing as investors increasingly demand greater information on ESG factors, not only for the economic impacts but also for the management of these risks for the long-term value of the company. Companies need to be producing greater depth and quality of information to enable investors to make more accurate valuations and meet their obligations.

Designate has worked with numerous ASX companies to establish and continually improve effective investor communications beyond financial reporting. Contact us to find out more about investor trends in Australia and how we can help you better communicate with your investors.

-Miriam Dalgety, Client Services Manager