Earth Day and ESG: an investment manager’s view

This Earth Day on 22 April 2023, the theme is Invest In Our Planet. Here Edwin Lo, Chief Investment Officer, Uniting Financial Services talks about the role of responsible investing in reducing the effects of climate change.

There is now over $1.5 trillion invested in responsible investments in Australia. With so many options available, how can investors tell them apart?

It is important to understand the strategy of an investment manager before making a decision to invest. Responsible investing can vary from factoring in environmental, social and governance (ESG) as part of a broader strategy to exclusively investing in ESG-compliant companies.

For the UFS ethical managed funds, all of our external fund managers must be able to adhere to the UCTAL investment philosophy and framework, with an investment guideline closely aligned to the Ethical and ESG Investment Policy of the Uniting Church. Alternatively, the manager must be willing to operate a separate investment mandate where the guidelines can be incorporated.

As part of our due diligence, the Investment Team assess the attributes of the fund managers, including their mission statement, investment strategy, competitive positioning and portfolio positioning.

On a semi-annual basis, we review the underlying holdings and conduct site visits with all the fund managers to validate their ethical and sustainability approaches and investment strategies.

Which themes are currently driving the investment agenda from an environmental perspective?

A key focus for the industry at the moment is on decarbonisation.

At UFS, we emphasise our central role as an enabler of this transformation by creating incentives for decarbonisation. Due to the increased urgency of climate issues and progress in the technical implementation of climate strategies in portfolio management, UFS is strengthening its previous efforts with a dedicated and ambitious climate strategy.

This strategy is aligned with the Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations. The TCFD aims to create a harmonised standard for corporate and investment climate disclosure, considering that international and local regulatory frameworks may require various levels of compliance.

Responsible investing has shifted in recent years from excluding certain industries to actively investing in companies that are doing good. What has driven this?

Investors and policymakers have become increasingly aware of the power of responsible investing to drive change for the better and manage future risks.

UFS looks to invest in companies that make a positive contribution to society and align with the 17 United Nations Sustainable Development Goals (UN SDG), which are the blueprint to achieve a better and more sustainable future for all.

Some of these goals include tackling inequality; improving human health and dignity; eradicating unethical social and labour practices; preventing pollution and environmental damage; and developing sustainable buildings and affordable housing.

Can you explain how investment managers influence company decision-making?

In situations where investment has an inappropriate activity, we leverage our influence via our external fund managers to engage with companies on practices we disagree with and work with them to implement possible strategies to change operations.

This may be done directly with the company or through participation in engagement undertaken by a suitable industry body, e.g. the United Nations Principles of Responsible Investing (UNPRI) or the Responsible Investment Association Australasia (RIAA).

What are some examples of active engagement making a positive difference?

Recently, Woolworths Group (WOW) was excluded from our investible universe because of its business exposure to gambling through its subsidiary, Endeavour Group. Nevertheless, UFS believed WOW could be a sound investment proposition, given its competitive positioning in the Australian retail market.

The Team joined our external fund managers to engage with the WOW Board and executive management to discuss options such as organisation spin-off or restructuring, taking the view that the group could focus on its core food business. We believed this to be a correct ethical decision to enhance shareholder value.

2021 was a significant year in the history of WOW as it bid farewell to Endeavour Group, which was demerged from the group.

Following the demerger, we conducted a detailed review of the ethical position of WOW and concluded that the new WOW Group is well-positioned to focus on organic growth opportunities, while continuing its transformation to respond to rapid changes in the retail environment. As a result, we have removed the company from the stock exclusion list.

In your view, are climate transition strategies having enough of an impact?

Decarbonising the fossil fuel sector requires a significant leap in clean energy investment. The electrification of transportation is another driver of the net-zero transition.

UFS invests in companies that are leaders in these fields with good access to capital, enabling them to implement decarbonisation plans and build a better world for people to live in. Examples include providers of green infrastructure, renewable technology or battery storage and solutions.

We are seeing much more coordinated efforts across the globe to combat the effects of climate change. What are the big events on the calendar for 2023?

The 28^th session of the Conference of Parties (COP 28) to the UN Climate Change Conference will convene from 30 November to 12 December 2023 in the United Arab Emirates.

Government, business and civil society leaders will attend with renewed net-zero plans and accelerated action for the new few decades. Further action on biodiversity, pollution, oceans and water will be high on the priority list.

Important information: The Uniting Financial Services (UFS) unregistered managed investment schemes are available for investment only to wholesale investors. Prospective wholesale investors who wish to invest via our unregistered managed investment schemes can access the Information Memoranda for these any of these funds on the UFS website. While the information in this email has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.