Part 3: Sustainability, and the net benefits to society
Kimon Kouryialas and Will Baylis, Portfolio Manager for the Martin Currie Australia (MCA) Sustainable Equity and Ethical Income strategy discuss MCA’s work on enhancing its Sustainability research framework and helping to facilitate positive change through company engagements.
Every company has some externalities that are harmful... The benefit to society comes from how they mitigate them, and how aware they are of their own risks in terms of their operations.
Kimon: Hi, I’m Kimon Kouryialas, I hope this message finds you and your family safe and well.
Welcome to our first Australian stewardship and ESG webcast. Martin Currie leading the stewardship and ESG revolution.
Today I'm speaking with Will Baylis. Will is a portfolio manager at Martin Currie Australia for the newly launched Sustainable Equity strategy and the Ethical Income strategy. Will and I are going to have a discussion around some of the recent enhancements to Martin Currie's Sustainable research framework but form the basis of this new strategy. Hi Will.
Will: Good afternoon Kimon.
Kimon: Firstly, I'd like to ask you why do you think it's important to have a focus on Sustainability?
Will: The essential reason Kimon is our clients are actually demanding this, and the requirement from our clients has grown exponentially now over the last few years, and events like the Royal Commission actually stimulated that demand for a much greater focus. Particularly if you’re an active funds manager on companies and pursuing companies as to whether they’re Sustainable or not
And you know our clients want us to test companies to pursue companies, to interrogate companies and actually to even partner with companies on this issue rather than relying just on a check and balance thing which where you just use data, or you use a box ticking approach, which quite frankly was used properly 5 to10 years ago.
It's quickly evolved from that Kimon, with events like the Royal Commission into the banking industry, for example, where now there needs to be evidence that companies are actually really doing the right thing, really caring about their customers, their suppliers, they're actually in tune with the regulator. And so. the demands from our clients have really, if you like, made us focus a lot more on Sustainability as well as governance which we've been doing for many years.
Kimon: Will, I know that with this new strategy that Martin Currie has launched, you spend a lot of time talking about the concept of what is “net benefit to society”. Could you just elaborate on what you actually mean by that?
Will: So, what we do in a very qualitative manner is look at all of the company's activities. We think about whether the activities actually benefit society in terms of whether they are using, for example, recyclable materials, whether they are actually mitigating the effects of carbon emissions, whether they are trying to reduce the level of waste to landfill, for example, whether they are taking out purchasing power agreements with renewable energy suppliers so that they are not relying on the traditional coal based electricity generation for their buildings or their manufacturing plants.
And we know that every company has what we call externalities, i.e. waste and carbon emissions, every company has some form of that and they are harmful. And the benefit to society comes from how they mitigate them, what products are used, how they source their products, and how aware they are of their own risks in terms of their operations.
And that's how we then form an overall view about their net benefit to society, particularly on a look forward basis.
Kimon: And so you talked about sort of the harm to the environment, how do you actually go about evaluating what that harm is, and I suppose when you've talked about carbon emissions, you know my question would be you know can a company really offset its carbon?
Will: Yeah, pretty good questions. So, we do rely on company data where it's available for what we call scope 1, 2 and 3 carbon emissions, and you know a lot of companies now are publishing data which is widely available. Companies also publish extensive Sustainability reports and they will look in detail, not just at issues like carbon, but also waste and recyclable materials, and they will also look at a whole lot of social issues such as their staff, their customers, their customer satisfaction and so on.
In relation to your question on carbon, and it's a really good one. You know in Europe for example there is a very deep market now for trading carbon certificates or carbon credits. But unfortunately, across the world that market is still in its very early stages. So, we believe that if you could just buy offsets through carbon certificates or carbon credits, we don't believe that is enough.
What we think has to happen is that companies actually genuinely do reduce their reliance on thermal based electricity load, that companies actually genuinely have a strong focus on recycled waste rather than waste to landfill. Companies have large budgets on research and development to work to lead to much better mitigation of waste and carbon. And companies importantly collaborate with each other to see better outcomes for the environment.
Kimon: Will, when we sort of think about the financial return benefit for companies, do you think that actually exists when they start to embrace Sustainability for the future and I suppose sort of a follow up question to that is are companies at risk of bad Sustainability practise? Will: Thank you for those questions.
What we're finding is that companies that have a strong Sustainability focus actually are getting much more efficiencies in the way they actually operate. So, a good example is Brambles which has Chep pallets which are used to move large volumes of goods. Brambles have what they called a circular economy approach, where not only are there palettes using recycled materials but actually returning those pallets back to Brambles and then reused time and time again. And it reduces the cost to their clients and it reduces the cost to Brambles. And that's a real example of where Brambles are collaborating with their clients to seek much more Sustainable practises in terms of movement of goods, and at the same time leading to much lower costs which improves their margins.
Other examples really quickly, like Coca-Cola Amatil are trying now to move to fully recyclable containers for their products, and so on. And then companies taking out long term energy agreements which are sourced from renewable energy. You know renewable energy now is very competitive to the traditional coal baseload, so we do see a direct correlation, Kimon, between companies that focus Sustainability in financial return.
Companies that risk being in poor Sustainable practices is something we watch really closely and examples are, you know the recent Rio controversy with the demolition of that sacred site in the Pilbara, which was I think nearly 60,000 years old. You know, Rio is conducting an internal investigation which will be released publicly, but that is clearly a material Sustainable risk to Rio if they can't operate in the Pilbara which has vast quantities of iron ore, if they can't operate in a cohesive and sensible manner with the indigenous owners of that land.
And in another example is Aurizon. So, Aurizon carry coal both thermal and metallurgical coal from mine to port, and so clearly when we talk to Aurizon and we need to think about what happens if thermal coal is no longer used as a source of electricity generation.
And then we talk to Amcor about the fact that they do produce packaging for tobacco, and you know the question is tobacco one, Sustainable and two, isn't it causing harm, ultimate harm to the ultimate customers who are use that tobacco?
Kimon: And Will, as sort of the custodian of our clients assets, what are some of the discussions or what are you seeing from a requirement point of view from our client base in terms of Sustainability measures in the companies that we invest for them?
Will: Clients are particularly concerned about the following issues:
Modern slavery. That is probably the most readily asked issue by our clients about the companies that we invest in, and so as a consequence we have to not only talk to boards and management about what their principles are in relation to modern slavery, but we seek evidence.
Great example, Rob Scott is the CEO of Wesfarmers. He spent a week with his Sustainability team in Bangladesh, amongst other countries, looking at products that they've been sourcing from factories in Bangladesh and other countries and making sure that they are actually not using underage labour for example or any other issues that would be controversial on the way they seek labour. They are the factories that supply the goods to Bunnings and ultimately to Coles when Wesfarmers used to own Coles.
So what we seek Kimon, is not just the fact that there's an audit, but we need to seek from companies that they are actually genuinely looking closely at modern slavery issues, and that management and the board are very aware of those issues and they have a programme to continue to evaluate that risk.
But the other questions we get Kimon, are, you know, how does a company treat its staff? You know if a company is employing 10 people or 100,000 people, it doesn't matter how are they treating their staff and what board policies are in place, and is there a board member who oversees the Social and Environmental issues that concern that company? And then how do they treat their customers and do they just rely on a score or do they generally engage with their customers? And then all those issues about recycling and the circular economy quite often are questions we get from our clients as well about Sustainability.
Kimon: And Will, I know recently you had met with Mirvac and Coca Cola Amatil with regards to discussions around Sustainability. Is there anything that surprised you in those discussions?
Will: Oh Definitely.
With Mirvac the big surprise for me is they have their own Energy division. So they are now building micro or mini power plants where they build a new Urban Development, which actually means that the residents who occupy those apartments or those houses could end up with zero electricity charges because all of the power is renewable. That I thought was just a really interesting aspect of Mirvac and how they approach Sustainability and renewable energy.
In relation to Coca Cola, I mean they aim by 2025 to have all of their plastic bottles sourced from recycle PET or recycle plastic, and at the moment I think they've achieved a 70% target. And remember Coca Cola operate not just here in Australia, but Coca Cola Amatil are in Indonesia, Fiji and Papua New Guinea, so they have not just big ambitions for fully recyclable plastic, but they have a 2025 target.
Kimon: And finally, Will, one last question what do you believe will be the impact on ESG investing in a post COVID-19 world?
Will: I reckon, Kimon, the key will be not just relying on data. So not just relying on an Environmental score or Governance score that's given to you by a company. You now need to actually show evidence, particularly as an active manager, that your analysts and portfolio managers and your heads of ESG are interacting with companies and seeking evidence about how they approach things like Social and Environmental risk, things like carbon emissions, things like recycling products.
And then finally it's the board, Kimon, it’s the board who are the stewards of the company's capital, and so it's understanding not just the chair, it's understanding that they've got sufficient board members with different skill sets, who have a level of knowledge which can actually see the companies through in the future from a Sustainability aspect.
And all of this what I've just said, Kimon, is being demanded from our clients and I think it's as stewards of our clients capital and boards as stewards of their companies capital, I think that collaboration is going to be far more in the future than it has been in the past.
Kimon: Thank you Will, I thoroughly enjoyed that discussion.
Will: That’s my pleasure Kimon, thank you
Kimon: And hopefully to all our viewers out there you found that insightful as well. Our next series as we alluded to earlier will be Will having discussions around stewardship with both Coca Cola Amatil and Mirvac. Please tune in.
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