The Ethical Investor: How important is corporate culture for ESG investors? We talk with fund manager Alphinity
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A recent report by Equity Trustees found that 83% of new funds launched in Australia in the past two years had no primary theme, but those that did had an ESG or sustainable theme.
“We expect this to continue as we push towards a carbon neutral world by 2050,” said Equity Trustees’ managing director, Mick O’Brien.
“The key focus of these funds is the environment, and reducing environmental impact through investing.
“The range of strategies is very wide, from having some exclusions to actively looking to invest in a positive manner to improve the environment – and everything in between,” he said.
According to Alphinity Investment Management’s ESG and Sustainability Manager Jessica Cairns, a recent trend that has emerged within the sustainability sector is corporate culture.
“This follows on from the the Rio Tinto report into corporate culture that they published earlier in the year,” Cairns told Stockhead.
In February, Rio released a report which revealed a ‘toxic’ environment at its workplace.
Almost half of Rio’s employees reported that they have experienced bullying in the past five years, and a third of female staff said they have endured sexual harassment.
Two in five Australian indigenous staff employed by the company also said they have encountered racism.
“These findings highlight the importance of caring, courageous and curious leadership – values which Rio Tinto has identified as priorities across the organisation,” concluded the report.
Cairns believes that corporate culture is crucial to a company’s success, and is an area where investors have an increasing interest in.
“We see company culture as a proxy for how companies are going to retain staff.”
“How are they going to be able to deliver different sustainable strategies, how they can manage risks, it’s all down to having a really good company culture,” Cairns said.
But measuring corporate culture is difficult, and has been something of a sticking point for many ESG observers.
There are however several indirect ways to get a sense of a company’s culture.
Staff turnover rate, number of employee referrals, productivity – those are some of the metrics that have been used to gauge culture.
“It’s definitely an area the ESG community is trying to get a handle on, in terms of what metrics should we be looking at when we’re thinking about a good or bad company culture,” says Cairns.
“We’re asking questions like, can we engage with the boards and management on the specific issues?”
On the ASX, corporate culture is indeed an issue that has gained a great deal of attention recently.
“Those problems could arise as a result of not having a good company culture,” Cairns said.
“So it is a challenging thing to measure, and is becoming an interesting kind of thematic that’s really starting to come through.”
Meawnhile, Alphinity’s founder and portfolio manager Stephane Andre told Stockhead that new ESG legislations in Australia are unlikely to have much impact on Australian stocks.
As reported last week, securities regulator ASIC and the ASX said they will start probing climate change impact disclosures of listed companies within the coming year.
“I think the listed companies have moved ahead of legislation and policies,” Andre told Stockhead.
“If you look at the oil & gas and the mining companies, they have already committed well in advance on the net zero targets.”
“The government policies will support things such as electric vehicles, but broadly speaking, at the big end of the market, the commitments have already been put in place by the companies themselves,” Andre added.
Andre also argues that inflation and a higher rate cycle will force money managers to have a more balanced portfolio.
“The central banks have been behind the curve on raising interest rates,” Andre explained.
“And as a result, they are now forced to do it much faster, and probably much more aggressively than they had expected.
“Typically, you want to do that when the earnings growth is still there in the market, but for the moment the earnings growth is not there.
“Most of the earnings growth is really just coming from the energy and mining sectors,” said Andre.
This he says, will make fund managers think more about diversification in their portfolios.
“So from a portfolio construction point of view, you want to be more balanced with more defensive and cyclical positions, but also a more balanced portfolio from an ESG perspective,” Andre concluded.
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