Part 7: Q&A session on the key topics and challenges we are hearing from our clients
Do companies really understand their Sustainability obligations? How has the role of proxy voting change? How are we tackling climate change and the transition to a lower carbon future from an investment perspective? How do you engage with companies on SGDs and modern slavery? What is the next big trend in Sustainability, now and in 10 years’ time?
We've all come together to share a cross team view on the Sustainability and ESG evolution
Kimon: As part of our Stewardship & ESG webcast series, “Martin Currie, leading the Stewardship & ESG Evolution”, I've brought together a number of key individuals from Martin Currie.
With me today is David Sheasby, Head of Stewardship and ESG, Megan Scott, COO, Will Baylis, Portfolio Manager at Martin Currie Australia, and Alastair Reynolds, Portfolio Manager for our Global Emerging Market strategy.
We've all come together to share a cross team view on the Sustainability and ESG evolution, and answer some of the specific questions that we often get with clients over the past 6 to 12 months with regards to Sustainability.
All: Morning Kimon
Kimon: Thank you. I thought I might direct this first question to maybe Will and Alastair. To both of you, do you find that when you meet with companies, do they actually really understand their Sustainability obligations?
Will: There is quite a degree of variance between companies that we meet, and that starts particularly with the board. So, the board, and competency of the board, whether the board has a director who is specifically involved for overseeing ESG and Sustainability is really important.
The second aspect is the chief executive officer, so whether the CEO as an executive that are really focused on implementing the boards ESG policies, within the group.
And then the third thing which is really difficult to measure is culture. So, do the staff, and even the suppliers, understand the obligations of the company in relation to Sustainability and ESG. They’d be my key reflections on that question
Ally: For me, I think almost every company that we speak to and emerging markets understands their obligations on ESG issues. Where we see differences maybe are in the SOEs, or else in companies where they have a high degree of national regulation. And in those companies their interests are very much more internal, nationalistic, dealing with their own either government or their own regulator rather than embracing external shareholders.
Kimon: And when we talk about boards and companies in general, I mean, what do you want to see more of from company management in terms of engagement? And I suppose what are some of the things that you would like to see less of?
Will: In terms of what we like to hear more from our companies in relation to engagement, and particularly relation to Sustainability and EGS, is a board and a CEO and executive team who are all totally focused on implementing a Sustainable future for their company.
Now what I mean by that is, do they all have a great knowledge about how they recycle waste? Do they really understand how they are reducing their energy consumption? Do they really understand what carbon offset is? And can they demonstrate that by giving examples?
And in the final point Kimon is, are members of their staff able to also talk in a very competent manner about what the company's purpose is from a Sustainability point of view.
So, in terms of what we need less of, we need less very wordy Sustainability reports which are generalised and don't have any evidence. What we need more of is Sustainability reports with lots of evidence, lots of examples, which speak loudly to those issues I've just mentioned.
Kimon: And David, what would be your comments in terms of some of the companies Sustainability reports that that you see?
David: So I think we see a range of reporting when we look at companies, and that goes from a nice marketing document, which really means nothing, to a company which is clearly evidenced that it's embedded Sustainability into how it's actually running the business, how it’s allocating capital and how it's making decisions.
Kimon: I might ask Megan the next question just regarding proxy voting. I mean we've certainly seen an influx on the importance of proxy voting over the last few years. Now I suppose in particular be interested to know, how does that change? How do we work with clients? But more importantly also we have external providers who just focus on proxy voting, and what's the relationship between all parties?
Megan: Yeah, I think proxy voting is a really interesting area. If you think about what proxy voting is actually trying to achieve, it's giving the voice to the shareholder. And I think you know, in terms of the asset owner, the shareholder, needs to have that voice so that they can make management and the board accountable on how they're running the company.
And in terms of, you know, particularly what we doing this sort of area, is we take on board the proxy voting advise, you know, from the provider, and then we really focus on from the investor’s point of view, and really focusing on the engagement, in terms of how their knowledge of the company.
And so, I think what we find more and more from clients then, is they wanting that knowledge. And even we have clients who don't give us the authority to vote on their behalf, they will do that, or they will as such outsource to these proxy advisors, but what we're finding more increasingly is that they want to know our knowledge in this area. And I think, you know, through the use of engagements and through what we do, we can assist them and bring up that knowledge for them as well.
Kimon: Let's move the discussion now to climate change, which is a hot topic for clients located globally. How are each of the teams tackling this in terms of its main thematic? And I suppose how does also that the work with David as part of Head of Stewardship help you, sort of you know, provide some sort of solution to our client base?
Will: So, climate change is clearly, as you rightly point at, affecting companies all around the globe. What is very useful from the point of view of having David as our global Head of Stewardship & ESG is David sits on committees within the UN PRI, who will look specifically as effective ways to mitigate the challenges of climate change. David provides us a really good framework in terms of how to think about effective ways of mitigating carbon emissions. And so when we bring those learnings back to our engagement here in Australia with companies, we delve into the issues around carbon offsets, so how genuine are carbon offsets, and we've actually we've had quite detailed conversation for the likes of Qantas and Woodside Petroleum, for example, on how effective their carbon offsets are.
The final point I’d say is using just offsets in our opinion is not enough. You need companies to seriously change the amount of energy they consume, the amount of renewable energy they lock up with purchasing power agreements, and you need to really see evidence that they're going to pursue a much lower resource usage in the future, to be genuinely convinced that they are concerned about climate and climate change
Ally: Climate change is very much a reality for every company that we look at. And as a result, we analyse the impacts of climate change in every company that we look at.
I think the move to decarbonize is an inevitable response to climate change, and what we're seeing in the energy space is that renewables are already highly competitive against fossil fuel, so the pressure really is coming on from a cost perspective in the fossil fuel sector. We were seeing gas prices coming down and displacing coal prices, and then the transport sector over oil has become the fuel of choice. We're seeing real opportunities in electrification, battery-based power, coming in and displacing oil in many cases. So that we very much believe it's real.
Where David's work comes into its own is in bringing us a standard approach to such a big and complex issue, in how we embrace with companies and how we engage on some of the technical factors around disclosure and standards that they could be meeting.
Kimon: I mean you both talked about in those comments around decarbonization. I mean we're hearing a lot these days about the push to transitioning to a lower carbon future. I mean what does that mean in practical terms for the companies that we're looking at that are rising to the challenge, and more importantly you know what does it mean from an investment perspective point of view as investors? I'd be interested in your points on that Ally.
Ally: Yes, the most obvious evidence we have of decarbonization at the moment is in the auto sector, where we're seeing, right across the world, the requirement to move to a less polluting source of power. And that's coming in the form of electric vehicle batteries. And this year, we despite what we seeing with COVID, we're still seeing the rollout of mainstream electrified, fully-electrified, vehicles from all of the global auto brands. That’s the first sign that we're seeing of fossil fuel being displaced in the market.
Beyond that is going to become very evident in the power generation sector, but that's a sector where we are already backing away from in our portfolio because of its damage to the environment and lack of demand.
Kimon: And David, another certainly a big topic globally is Sustainable Development Goals. Why is it significant for businesses to engage and align with SDGs?
David: So, I suppose one way of thinking about the Sustainable Development Goals is it is effectively a blueprint for a Sustainable future. So, there are 17 goals that kind of set out clear ambitions to be achieved by 2030, and they are ambitious. So, they were set back in only 2015, and one of the things that is inherent in that is that the private sector has to play a part in achieving those goals. And actually, in that it creates a huge opportunity, potentially, for some companies providing solutions to some of those potential issues. But also, the Sustainable development goals in aggregate also describe a Sustainable future and the behaviours that you would want from businesses overall. So, it's really the opportunity that is very exciting in that.
Kimon: And Will, a question around modern slavery. I mean, companies that you're engaging with, can they mitigate the risks of modern slavery in their supply chains? And what engagements are you having with clients on this particular topic?
Will: Yeah it's a really challenging issue. With every board and every management team that we engage with, we always ask them about one, their awareness of the new modern slavery legislation in Australia, and then two, we ask them to demonstrate how they actually gain assurance that their suppliers aren't engaging in malpractice in relation to modern slavery.
And then when we talked to other companies, like the retailers, some of them will use a third party, but the third party acts on behalf of all Australian retailers and does serious type kicking around factories that quite often supply not just one retailer but several retailers here in Australia. And again, those companies will send, not necessarily the CEO, but they'll send a senior executive to also be part of that auditing on a timely basis.
Ally: What we are seeing is that companies are very good at reporting their activities in relation to their own staff, their own organisation. So that could be there HSE policies, there training, their attitude towards ethics, and how that translates or extends out into their contractors and suppliers.
Actually, finding detailed information beyond that is proving to be quite difficult. In relationship to modern slavery, because it's an illegal activity, very few companies are able to find evidence to hand the that type of practises is taking place. A bit like corporate fraud, if it is present that the perpetrators but will do as much as possible to cover their tracks and to cover that up, so it is proving to be an area where we think it will be a long journey to really find a robust system for identifying and rooting out the evils that are modern slavery.
Kimon: And then one final question for the group, but I might start with you first Megan. What do you see in terms of Sustainability 10 years from now? What do you think is going to be sort of the next big trend, not only in Australia but globally as well?
Megan: You know obviously we're going through COVID at the moment, but you know, the Australian summer that we had here, we had horrific fires and there was really community sentiment, and a shift and I think that push and that shift really does continue.
I also think we touched on modern slavery. I think that's something that is where we're getting used to that in Australia I think, and you as Will mentioned were bringing in that law which will come into effect next year. And I think that the things that clients will demand will be more around specific data, and as Ally mentioned, having that evidence that, you know, we've delved deeper, we've looked at things, so that you could actually get into that crux and the data, I think of looking at things like modern slavery. So generally, I think those two things will continue for some time.
Ally: We expect that the continued focus on the decarbonization within climate change, water scarcity, again within climate change, but also on cyber security and data privacy as the world becomes more digitalized, we think they're going to be areas where investors will become increasingly focused to make sure that that practise meets their expectations.
Will: In 10 years’ time a good company is going to be one that actually cares, not just for their shareholders, who cares strongly for their communities in which they operate in. Its supplies will have very good coordination with the company in terms of what is expected from them, ala modern slavery etc. Its customers will have a strong sense of what is the brand really stand for, is the brand genuinely a Sustainable brand, is it focused on Sustainable practises?
David: And I think in 10 years’ time, I think Sustainability will be the norm in terms of how companies think about running their businesses, and what investors will expect of us asset managers to be incorporating Sustainability, but also of their companies that they will invest in, in terms of how those companies behave.
Kimon: Well, thank you everyone for your time
All: Thank you Kimon.
Kimon: I hope you have found this session, and the other videos in the series, interesting. Please feel free to reach out directly with any feedback or additional questions on these topics. Thank you very much for listening.
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