According to Ausbil, investing in companies with forward momentum in their ESG performance can be beneficial from the perspective of adding alpha, as better risk management is likely to add a premium to valuation over time.
Head of ESG research at Ausbil Mans Carlsson-Sweeny said the market is saturated with discussions about ESG issues. However, many investors are missing a crucial point about this increasingly important aspect of investing.
“Investors whose sole focus is only investing in companies with the relatively best ESG profiles might develop a portfolio of expensive stocks and miss the potential for growth in companies with a positive ESG trajectory,” said Mr Carlsson-Sweeny.
Mr Carlsson Sweeny believes investors can identify companies working to improve their ESG profiles, and that these can be a leading indicator of operational performance and present a vote of confidence for management quality.
“Furthermore, companies that are improving their ESG approaches tend also to be those that are improving their overall business. And, in turn, that will be reflected in their profitability, risk management and ultimately their share price,” Mr Carlsson-Sweeny said.
The fund manager added that ESG integration into analysis and investment decisions is making better informed investment choices, ultimately in order to obtain higher returns.
Companies with poor ESG profiles often perform poorly.
He also noted that the “war on plastics” is a growing ESG issue, as new estimates reveal there will be more plastic in the ocean than fish by 2050.
“While some companies are responding to this challenge, others are being driven by changing consumer preferences. This is happening in our own backyard as seen in Australian supermarkets reducing their use of single-use plastic bags.
“The world is changing, and companies need to adapt, and demonstrate that they can adapt. How they approach ESG issues is a proxy for this,” Mr Carlsson-Sweeny concluded.
