With so much money flowing into ESG funds and investments, where do you start, what are the most important metrics and how can you tell if the investment is genuine?

Stockhead put these questions and more to award-winning ESG fund manager Emilie O’Neill.

She recently won the Green Rising Star of the Year award at the Finder Green Awards and the fund she is 2IC of – the eInvest Better Future Fund (ASX:IMPQ) – won the Green ETF of the Year award.

We asked about her approach to ESG (including the most important metrics applicable to any company), her advice to newcomers to ESG funds and how ESG investing has shifted in the past couple of years.

 

How do you and your fund approach ESG?

“What the focus of The Better Future fund is really to have that authentic ESG experience for the investors but also importantly making sure we deliver a good strong, consistent returns for our investors because that’s obviously very important,” O’Neill says.

“So ESG investing or even ethical or value aligned investing has been around for a while but it’s really starting to become more sophisticated and expectation around what ESG funds should look like is changing.

“And what we say to investors is you really should go in and have a look at the holdings of an ESG portfolio and [ask] ‘does that align with what you’d expect to see in a sustainable fund?’

“What tends to happen with some products is you take a traditional portfolio, apply negative screenings but they may have quite high revenue thresholds and you end up with a portfolio that’s not that different from your standard equities portfolio.

“We’ve taken a different approach. We’ve really started it from the ground up, we’ve gone out seeking those investment opportunities or industries that are improving environmental or social outcomes.”

 

How do you reduce the risk of greenwashing?

“There are a few certification screens in the market that help to identify or reduce green washing risk; one of those organisations is RIAA [Responsible Investment Association Australasia] and they have a responsible return website where they look at certifying products as responsible investments.

“Our trust version of the ETF is [RIAA] Certified which is recognition externally of our process.

“There’s the Ethical Advisors Co-operative. They’re a group of advisors who look to put a green leaf rating for investment products.

“LONSEC has a 5 Bee scale rating and Zenith has ESG classification; we receive the impact classified on their rating system and [LONSEC] also gave us 5 green Bees.

“But what we’re starting to see because of that greenwashing risk is other countries have started to roll out a little bit more regulation across the space to minimise the risk of greenwashing.

“So in the EU you’ve had EU Taxonomy which is targeting corporates but also funds which sell to European consumers [requiring them] to disclose investments that are aligned with some of their green activities.

“So it’s really the first attempt to standardise the framework which is aligned to address those risks.

“And in the US with the Biden administration we’ve seen some more focus on this. They are [focusing on the] quality and oversight of climate disclosures for corporates but also requesting public comment on climate disclosure potentially for funds as well.”

 

How has COVID impacted ESG in the investment community?

“So on the changing landscape, what people had thought prior to COVID or two years is ESG investing is a bit of a niche, it was not for everyone.

“It was for those kind of ‘really green’ investors and there have been a number of triggers in the landscape over the last two years – including COVID-19 – that have accelerated the call to action on ESG and sustainability and people wanting to align investment activities with things contributing to what we call a better future, because they’re more heightened to those risks.

“In Australia we had the bushfires in early 2020, then the floods which were pretty soon after that and those extreme weather events [said] ‘OK we had to do something about climate change or otherwise we’re going to be impacted from a society point of view but economic as well’. If you remember, a lot of those towns were impacted by tourism.

“COVID has been an ongoing health pandemic but we also had blasting of the [Jukkan] Gorge by Rio Tinto which was a big acceleration on the rights of traditional owners as well and we’ve had things like the US re-sign Paris and China, South Korea, Japan all making net zero emission targets.

“All of these things have led to call for action on investing in sustainable way and we’ve seen that reflected in the [investment] flows.

“In the last four months we’ve averaged $55 billion globally into ESG or sustainable products.”

 

Have companies increased disclosure?

“On companies disclosing more ESG, it’s definitely positive and something they consider important and investors are asking for it.

“We have an internal scoring mechanism, which means that we can look through the data disclosures and actually work out whether a company is authentically focused on sustainability and how we do that is through engagement.

“So we engage with lots of companies every year and really talk to management and the boards about their approach to sustainability. That allows us to determine if whether it’s ingrained in the organisation or they’re just producing fancy sustainability reporting.”

 

Can resources be an ethical investment?

“That’s an interesting topic of conversation and it’s one we have a fair bit in the industry.

“I think there is a place for some funds to invest in that space, particularly if they’re focused on engaging with these companies to improve their outcomes.

“For us they’d have to do something that was super positive to consider it – it’s not a sector we actively seek out.

“But you need precious metals to make renewable energy so it is a tricky one and needs different approaches, but for us they have to do good things to outweigh the harm of, for example, safety, environment performance or indigenous heritage.”

 

Do you think our superannuation system is a good thing for ESG investments in that it makes ordinary people investors and makes them consider ESG funds?

“We’re seeing a lot more money flow into ESG super or the sustainable option in non-sustainable focused super funds.

“It’s definitely helping to move the weight of money towards more sustainable assets so it’s definitely positive for the sector and reflects that increased investor interest in the space.”

 

You’ve talked about “a better future”. When you talk to investors of different demographics do you notice different perceptions about what that might look like?

“What we tend to see is people who most interested in the space tends to be millennials and High Net Worths (HNWs) – which is quite interesting.

“So for millennials they want to put investments behind [their] values and how they live their lives and HNWs want to be giving back.

“But what’s been proven wrong is you’re not giving up returns to invest in a sustainable way and that’s creating interest across all age groups and demographics.

“It shouldn’t be part of your portfolio just because it’s a way of generating strong returns, not a niche of impact investing.”

 

What are some of the most important metrics that can apply in any company in any sector?

“So there’s definitely not a one-size fits all because what we find are certain topics are more material for certain companies – even on a sector level it does depend.

“But typically on a high level across all companies we’re really making sure they have gender diversity represented across their firm, whether that’s an employee, board or executive level.

“We’re making sure they’re managing modern slavery risks in their supply change, they have commitment to climate change and are working to record and set targets for emissions profile.

“And cybersecurity is one that’s popped up a little bit to have more conversations about – it is a material issue for companies to experience a cyber security breach.”

 

What would you say to people first getting into this space who want to create a better world but aren’t sure where to start?

“What they could do as a first step is go into the RIAA responsible returns website and it provides a list of all the certified products and they can click what exclusions they want, and which ones are important to them.

“And it will provide a recommendation or a list of the different investment products that could work in that space.

“But my advice to all investors is to go into the fund and look at their holdings and that will give you a big sense of how it aligns with how you want to invest.

“There are a few in the ETF space, like IMPQ, that are worth considering. Although again it is well worth doing your research into the ETFs and the indices they use to see whether they are appropriate and meet your values.”

 

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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