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Ethical Investment Series #14 – Transcript

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Ethical Investment Series

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SUMMARY KEYWORDS

governance, clients, esg, area, environmental, advisors, fund, people, companies, businesses, big, investors, issues, fossil fuels, assets, social, important, conversation, measure, prioritizing

SPEAKERS

Fraser Jack, Elizabeth Hatton, Philip Moffitt, James Harwood, Paul Garner, Alexandra Brown

 

Fraser Jack 

Welcome back to the x y advisor podcast. I’m Fraser Jack and today we into part four of our five part series on ESG. Investing. Today we’re really looking at going a little bit deeper into what is the the environmental part the the social part and in the governance. And then also having a think about an overlay of what that looks like when you’re having these conversations, prioritizing conversations with the clients, as well as the fund. Welcome back. Phillip Moffitt, I frozen thank you for joining us now you’re the you’re the perfect person to ask this question. So let’s dive in. Let’s take a deeper dive into the you know, the environmental, let’s start with the E and then move on to the s and the G tell us what they are. Tell us how they work. Let’s go a little bit deeper into what’s involved in each part.

 

Philip Moffitt 

Yeah, I won’t look, I think at the top level, they are what they say on the cat, you know, so we’re thinking about how assets or businesses affect their environment. Loosely, I guess people think about the physical environment. So it’s climate and land, degradation, and so on. And there are a bunch of kind of metrics and ideas that are popularly understood like carbon footprint, or soil quality, or water use, you know, and those things can be measured and reported on and compared, social is a little more amorphous, I think then environmental, because for social kind of means everything else, in a sense. And so that’s how you interact with the community. It’s the jobs, you provide it to your employer, it’s how you employ them, it’s how you treat them, how you treat communities around your assets or businesses. And so it’s somewhat harder to find metrics that are universally accepted and understood in that space. So it’s a bit looser. And governance, is really trying to have confidence that the reporting and understanding you’re getting around social and environmental as well as financial returns from these assets is verifiable and comes at standards that you you can accept and are acceptable to the marketplace for the governance part, in a sense planets.

 

Fraser Jack 

So the government, the governance part is I guess, the part that’s always sort of been around a lot of businesses, because it’s already been there. The environmental part, as you mentioned, there is a lot of, there’s a lot of measurements, it’s a lot easier to measure, I want you to overlay the impact, because you’re obviously do a lot of work in the space of impact investing. Is that mainly in that social area? Do you find all?

 

Philip Moffitt 

Now it’s both? It’s both, um, what we’re really looking for is, is people who can, you know, be confused, and I don’t think the markets been very clear about what the difference between ESG sustainability and impact are. And if you ask three people, you might get four views. But to our mind, impacts are about outputs. So the outcomes from a business will have an impact on employment, or the environment or, and what an impact investor is doing is generally taking the UN SDGs. So set of measures the UN has prioritized for our businesses and assets to try and focus on to improve their footprint social footprint, and trying to line up the outputs of the business with some of those issues so that we could be as cheap as SDGs. So that we can say, here’s a business that’s set out to reduce its carbon footprint, and this is the overall reduction in its footprint. ESG refers to more how they do it, and what the processes are in place to get them there. And how they’re improving or not improving. So they go together are but but they’re different. And and I guess our investment thesis is that because they go together at the moment, we focus on ESG more in the marketplace, it’s a more readily understood concept, it goes better with sustainability. That’s really the heart the beating heart of improving businesses, social impact and valuation and the impact they generate over time is a Going to be a convenient way a convenient universal way of reporting what some of those improvements look like.

 

Fraser Jack 

Yeah. Okay, so, so focusing a lot on those output the outcomes of those improvements and then being able to quantify that, yes. And it provides a messaging around. these are these are what we’re trying to do in the world?

 

Philip Moffitt 

Yes, exactly. And so eventually, you have businesses or assets that are consigned to the marketplace, these are our practices. This is what we’re trying to produce a financial return. But we also are trying to produce a series of measurable outcomes that have an impact in our community. And it could be an employment number one’s employment, you know, the very best thing anyone for any organization can do is provide jobs, jobs, and income is top of the list from our perspective. It could be provide jobs, it could be provide jobs in certain sectors to certain sorts of people, it could be environmental, could be educational, could be health issues, here are the things that we’re going to measure and report on because they really mattered to us. But the guts of the ESG is the is the operational machine, rather than the other?

 

Fraser Jack 

Yep. Can you give us some other examples of impact businesses that are doing great in this space,

 

Philip Moffitt 

you know, strictly defined impact. People would talk about businesses that are set up with an objective of meeting some of those un SDGs. So I don’t even start my business without knowing what the outcome is. We’ll talk about theory of change, and so on. And I’m sure you’ll have some people in the podcast who talk about that stuff, I guess, from our perspective, as investors from bekins perspective, or personal perspective, is that I’m not necessarily attracted to businesses that already know what those outcomes are, they are attractive, what I’m really attracted to is businesses or assets that have output at the end, but don’t really understand it. And they need to be taken on a journey, or they want to be taken on a journey to understand what those potential impacts are and how they can be measured. So I think about a really simple business, we invested in a business called slurry tub, where, at the end of the day, when the builder washes out his concrete mixer, you know, he hoses it out, that slurry is highly alkaline, and it’s supposed to get an absorption period and all sorts of stuff and concern satellites and builders just tip it down the sewer, or they dump it on the grass, and it finds its way out of the water table. And it’s it’s full of heavy metals, it’s so an entrepreneurial builder bought his idea of slurry tub, which is basically think about a big coffee filter, plastic tray, with a paper liner, you put the slurry into that it captures all the heavy metals and all the the alkaline debris and stuff and at the bottom runs water up. He bought us that idea, knowing that it had an environmental impact. But also knowing that it was potentially going to drive a profitable business, I hadn’t thought about measuring the heavy metals hadn’t thought about measuring the quantity of water, when we help him to measure those things, then he’s got impact that he can report it to the marketplace. But this has an impact naive business, really, that is a pure impact business. And so that’s a great example of businesses that are set up to generate return and have a social impact that aren’t wouldn’t originally qualify as impact, but really are and how that can be taken on a journey to the reporting standard.

 

Fraser Jack 

Yeah, fantastic, fantastic example, thank you for sharing that. Just lastly on this topic as we go through advisors, talking to their clients and lean into the prioritization conversation. Because, you know, in a perfect world, we have, you know, an equal quantity of e, s, and G and that all works together and the business does all those things. But look at what tell us in reality how this works with clients prioritizing one over the other.

 

Philip Moffitt 

Yeah, well, the guy. So if you can improve your ear at the cost of your essay, you do it, if you improve your essay at the cost to be read you do it, you only improve both really difficult conversation because it’s it good goes from taking a set of ideas that we all think are important, you know, improving the environment providing jobs or what have you. Two, I’m going to value this one above that one. And so the relative valuation of these different elements is something that nobody is going to agree with. I would guess that the optimal path for advisors and investors is to try and see a path forward on all and to reject anything where you think a path forward on one leads to a degradation of the other. But you’ve also got to think that in the world of input, perfect information and standards of reporting, if I’m a business Cisco and poor improve my environmental impact at the cost of social I might focus on the environmental impact and and apply the social. And that’s why you need really rigorous due diligence around this stuff and why the industry’s really in its infancy around these valuation

 

Fraser Jack 

questions. Yep. Fantastic. Thank you for adding that. Those gems will catch you in the next episode where we talked about supply and demand.

 

Philip Moffitt 

Okay, cool. Thanks for

 

Fraser Jack 

welcome back to this episode. Elizabeth.

 

Elizabeth Hatton 

Thanks for Thank you for the invite.

 

Fraser Jack 

Problem net In this episode, we’re talking about the idea of, you know, prioritization, we’re looking at the E, the s and the G separately and working out how, what sort of conversations you’re having with your clients at the moment around, you know, what they, what they what they are, do you go into each one? And if so, let’s let’s sort of go, let’s dive into that idea. What would you say to your clients that want to break down what is in the SMG?

 

Elizabeth Hatton 

I usually say to them, is a SMG, or if you’re sustainable and responsible investing something that is an issue four? And which bits of the so you actually need to ask plants the question. And the other thing I usually say is, and the responses usually will you tell me, and then my responses will, this is a very individual thing. What’s important to you in terms of ESG, and being responsible is different to what’s important for me, I use a fairly basic questionnaire, they cannot counseling. And the reason for doing this is that they can actually start to think about which one of these things is or isn’t important.

 

Fraser Jack 

What sort of things? What sort of things on your question here?

 

Elizabeth Hatton 

Do you know if your super fund invests in a and which of these issues are important to what is or isn’t and what module might be important, my experiences is, is that people fail to fill it out. And that the questions, which I think are fairly straightforward, are just too difficult for people to grapple with. And because they haven’t thought about these things before, and they don’t want to. And usually when people talk about ESG, and they wanting to invest in this type of fund, or to divest of something else, it usually comes down to one or two issues, like what I’m interested in is forest degradation. So I don’t want my funds go into anyone that does this sort of work, or I’m really interested in human rights. And I don’t want my funds to go to anything that’s this is taking advantage of, of conditional sale, the power of the world’s largest library, I have one client who is invested in something that’s very, very, that has done very well, but it has reo in his own, he doesn’t like reo. And now the client who didn’t want to invest in this similar sort of family because they had Woolworths because and because was was then associated with parties with just not anymore. Those things are what really, what really stuck with people. So it’s incredibly individual. Some people are into animal rights, it’s a matter of drilling down and saying, this is a fund or a series of funds or options that I think may be suitable, depending on what you’ve said. And so why don’t you have a chip one that you choose? I think that they’re all similar in terms of what it is that you’re wanting? Is there anything in particular? And just on that, because I think the question

 

Fraser Jack 

is great to have some sort of a questionnaire that goes through a lot of those underlying aspects, you know, like in not just environmental and, or governance as as the main headings, but going into, like, what is it as you said, deforestation or climate change or greenhouse gas emissions? And in that question here, because I’m just trying this on as a consumer, is this something that might be I more along the lines of I don’t want, I don’t want this and I don’t want that, therefore, that that pushes me? Or is this more or something that I guess depends on the person, but I do want this Okay, towards motivation.

 

Elizabeth Hatton 

So, the question is basic is basically got, you know, these are kind of like 10 major issues that have been identified as issues of concern. What do you think about them? I care, I don’t care or it doesn’t make any difference. It goes along those sorts of lines. So saying it’s quite difficult to find a product that fits everything that is that the clients wanting? And that there has to be some choice and that people let go of, Okay, well, if it’s mostly what I want, then it will be okay.

 

Fraser Jack 

Yep. Okay. So it’s, um, if it doesn’t have the things that they hate, that’s the first step. And then if they and then if they move, if you’re moving towards something that they do want, then that’s sort of the second step.

 

Elizabeth Hatton 

And taking into account that some of the biggest polluters for example, in Australia, moving down the track to become more green, And they’re also funding initiatives to become better in terms of environmental degradation, if they’re moving along the right way. And if they’re actually demonstrating that this is what they’re doing. Is that good enough for you? Yeah. Okay. So I was just having this conversation with the client. It can’t be black and white. It’s black and white.

 

Fraser Jack 

Yeah. Yeah, there’s, there is no, it’s all. It’s all 50 shades, isn’t it? There’s this, there is no, there’s no perfect solution here. It’s around finding a balance. That’s right. Fantastic. Thank you, Elizabeth, for coming on this episode. We look forward to chatting to you in final episode of this series. Thanks for joining us again, Paul. ganar.

 

Paul Garner 

Thank you very much.

 

Fraser Jack 

Now in this episode, we are going deeper into the E s and or G, I should say and talking about how we talked to our clients about individual considerations and prioritization. Let’s start with that environmental.

 

Paul Garner 

Yeah, well, the process I go through is there’s a series of it’s, it’s like a fact find type of thing of a pro forma basis based on environmental, societal and governance issues. For instance, fossil fuels would be a specific environmental issue. Do they want to support that avoided neutral about it or want to know more about it? So we go through each environmental issue, and the individual indicates what their feelings are about that particular issue. From that vetting process, we gain a picture of what’s important to them, what do they want to support in terms invest more in? What do they want to avoid in have nothing to do with? So from that picture, we then try to match that with what’s available in the market, in general, managed fund types of things. And if they don’t, if there’s no, like off the shelf option for them, then it’s up to us to design a very specific and customized portfolio to address what what’s important to them. That’s not an original idea. That fact, fine. It’s It’s It’s the responsible investment Association, and, and my colleagues have all been very influential in in developing that sort of vetting system.

 

Fraser Jack 

Yeah, that makes sense. Now, with your little mini factfinder. Regarding the ESG part, what sort of things are you bringing up in the environmental space? That was I mean, obviously, fossil fuels is one, but what else?

 

Paul Garner 

Yeah, that looked at that’s a key one. The other is mining, some people are dead against any mining, others will tolerate gold. Lithium has anything to do with the making of batteries, for instance, which is vital in that in that area, logging, old growth forests, tobacco, or no, there’s more of the societal area, that fossil fuels is the huge one, renewables is the other support area that people are really concerned about on the environmental side.

 

Fraser Jack 

Yep. So if we go environmental, if we just jump into that, you know, avoiding, say, fossil fuels, do you then also put your renewable energy as you know, to support? So do you have sort of both and you’re thoughtful? Yeah,

 

Paul Garner 

Indeed, indeed.

 

Fraser Jack 

Yep. Okay, so it’s not just the, say, the fossil fuels of the world, it’s also the renewables and the positive ones. So they can actually say, No, I want to support that. And I want to avoid that I can. Okay, great. And if we go into the societal or social impact section, talk to us about what you’d have in there. What are the different sections

 

Paul Garner 

we’ll get gambling is a key one. But but also more niche issues like stem cell research. IVF, those sort of more medical, human types of areas. genetic modification is a very hot topic. Gaming is always a big issue for most people. alcohol. Yeah. Generally, people are ambivalent about that. Because then enjoy that part of life. Yeah, it that’s more subjective. The governance side is sorry to pull before we go.

 

Fraser Jack 

Is there anything around the human trafficking human slavery, or equality or rights?

 

Paul Garner 

Yeah, yeah. huge issue on that in terms of slave labor, human trafficking, supply chain, that that, like how deep do you go to investigate those sorts of issues? Most people are wanting to avoid that or support, vetting of that area. That that’s probably the biggest societal issue union. You know, it’s, it’s, it’s easier for us in an Australian context to take those things for granted. But when we’re dealing in an international sense, it’s it’s very important. And also, understanding where supply chains are going in those areas as well.

 

Fraser Jack 

your supply chain has been the big one it has, and it’s been in the news a lot lately for you know, it’s not just a company you deal with, it’s the companies they deal with. How do they report on that? And how do they display that? So it’s been a it’s been a tricky task, I guess

 

Paul Garner 

it is, and, and trickier also on in terms of assets allocation, it’s much easier to vet those sorts of things with equity funds, but when you get into the fixed interest area, that that’s, that can be very tough. But we’re seeing more green fixed interest options being available. that’s a that’s a real tricky area in terms of where where’s that bank? We’re investing in? lending their money?

 

Fraser Jack 

Yeah, extremely difficult, because it’s probably not not common knowledge. Fantastic. And so that’s the social side. What about governance,

 

Paul Garner 

governance is? How does the company interact with its community? How does it pay its executives? How does it pay it staff? unionism? What are their voting? What’s the corporate behavior been, like, in terms of banks are a great example, in terms of what industries are they funding, there’s been a lot of talk about that, and a lot of activism about that too much people are very supportive of all those corporate governments issues, they want to, they want to support companies who are being good corporate citizens. And that’s reflected in in how they treat their own staff, and how they treat their suppliers, how they treat the different people in their supply chains in their, in the influence areas.

 

Fraser Jack 

This is an area that I’m sort of learning a little bit about To be fair, because obviously, I sort of came at this with the idea that governance was fairly here in Australia anyway, we’ve we’ve sort of got some good processes and reporting in place, we’ve got a lot of regulators keeping an eye close on a lot of these big businesses. You know, we’ve seen the Bankston and others getting dragged in front of royal commissions and bits and pieces and health care and those sorts of things to help hold them accountable. So that’s why I thought we had a fairly high set of standards of governance in this, obviously, in this country and a few others. But I’m sort of learning a little bit along the way with, with regard to, you know, being able to pick and choose within those companies that if they do find themselves, or you know, their behaviors are poor enough to find themselves in front of a royal commission, then then, you know, avoiding those behaviors, avoiding those businesses.

 

Paul Garner 

Again, it’s such a subjective thing. And what comes out in the media can often be an over an overstatement of particular areas, you know, the reputational damage that can be done, you just look at what happened to ANP, you know, behavior in certain aspects of a company just reflected across the whole company. So it like how deep do you go? How general generalized, do you take these judgments? It’s a tricky area. And it must be very difficult for companies to navigate through as well. But then you see the, the influence on the behavior of the banks, in terms of are they funding coal miners, for instance, and then you look at the political pressure that comes back on trying to dissolve that, that influence by creating political pressure about not having that influence over over corporate decision making. So it’s a it’s a fine line, some for major Institute or major banks in in any area in terms of how much

 

Fraser Jack 

political pressure on one side to open up funding, depending on what the government wants to do. And then they’ve got societal pressure saying, No, we don’t want you to fund this, that sort of activity. And they’re in the middle trying to make those decisions. It’s interesting. I no way think it’s an easy to see, you know, position to be into and to have those conflicting, conflicting concepts to coming at you and having to make a decision to to keep everybody happy. Paul, thanks so much for sharing Your thoughts and ideas around what you do in this space for helping clients understand, you know, the things that are important to them. I really like the system know you have words, you know, avoid support neutral or more information. I think that’s a great a great takeaway from this episode. So, Paul, thank you so much for being involved. And we’ll see in the next episode. Thank you. Welcome back to this episode. Alexandra.

 

Alexandra Brown 

Thanks so much, Fraser. Great to be here.

 

Fraser Jack 

Fantastic. Now we are talking about all going a bit of a deeper dive into the ESG conversation and then we’ll after that, we’ll have a chat about prioritization. Tell me, let’s start with environmental what what are the big things you’re seeing in the space? And from both, you know, advisors and fund managers and consumers?

 

Alexandra Brown 

Yeah, great question. With environmental, what I’ve noticed more and more as well is that it’s being separated into positive and negative environmental, you know, before it used to just be lumped into this whole, like ESG. And these are the environmental issues, but it’s really being separated into what’s harmful and controversial. And then also what’s creating positive impact. So I love seeing that. And I think as far as the harmful areas go, you know, there is the usual ones, you know, animal cruelty and fossil fuels and environmental destruction and things like that. But I’m seeing more of more areas around things like palm oil, and plastics, and other forms of air, water and land pollution. And just referring to palm oil. I’ve got it in the environmental section, but it really does straddle the social aspect as well. And, you know, a lot of people when they think of palm oil, they just think of deforestation and clearing of land. But there are so many issues with women and children, especially in their supply chains and in in the as workers as well. And it’s just it’s horrific for a lot of social issues. But I guess turning to now to the environmental the positive areas. What I’m seeing there is lots of things like clean transport, clean technology, energy efficiency, recycling, sustainable forestry, sustainable food systems, really big one, too. And circular economy is coming out loud and clear now, which is basically it’s, it’s based on the principles of designing out waste and pollution. So designing out waste and pollution, keeping products and materials in use in that cycle and also regenerating natural systems.

 

Fraser Jack 

Yeah, amazing. This, I like the idea that it’s trends, that is moving towards that negative and positive, it makes it really easy for a consumer to, to understand that and to be able to say whether they’re for or against, or they feel strongly or not so strongly about those, when when it’s presented as foreign against rather than just presented as a thing in a heady field positive negative, I think it’s easier to quantify their, their attitudes towards talk to us about this, the social aspects, what are you seeing in that space?

 

Alexandra Brown 

So with social again, if we’re looking at the harmful there’s the typicals, there’s, you know, the alcohol gambling, tobacco weapons pornography, they usually like those big negative screens, a lot of them have been around for a long time and and advisors, you know, possibly more aware of those things. But we’re seeing a bit more of things like excessive consumerism becoming a bit more to the forefront correctional and detention facilities as well. predatory finance, so that buy now pay later and that the payday lending and things like that sugar and junk food, a big social issue now as well harmful when it’s when it comes to people’s health. That’s more under the the negative side.

 

Fraser Jack 

Yeah, the poetry finance is a big thing. I think for financial advisors, I would see a lot of that obviously, with the, you know, by now pay lighters and, you know, ending up with extra credit cards that you didn’t even really want.

 

Alexandra Brown 

Absolutely, and then having to help the clients through that.

 

Fraser Jack 

Fantastic and what what are you seeing on that positive side of social,

 

Alexandra Brown 

a lot more about equality, and just human development in general indigenous rights, which is which is great to see a lot more of that, more of the the social innovations, technologies, labor rights, of course, the Sustainable Development Goals has got a huge portion of social aspects in there. Inclusive finance, so making sure that finance facilities are accessible to all well, you know, we take a lot for granted here that we have so many we have such accessibility to finance, you know, on our mobile phones and all that sort of thing, but that’s not the same across the globe. And also gender diversity and gender balance as well is becoming a to the forefront as well. seeing some improvements for instance, even just in the ASX. The ASX 200 boards according to The latest reports which was July Actually, this year, about a third of ethics 200 boards are women, which which is great. And unfortunately, there are still two boards on the ASX that don’t have any women. But yeah, gender gender balance is becoming a big thing.

 

Fraser Jack 

I think I saw something a few years ago that said there were more Peters on inboard rolls, and there were women that likes cold Peter, and I thought that that’s Oh, my goodness. Fantastic. Yeah, no, I agree with, like, with, with a lot of that stuff, Tom and tells her the governance side because this is that board role, kind of that board conversation also sort of fits into the governance space, too, doesn’t it? Yeah,

 

Alexandra Brown 

absolutely. It does. So you know, what’s happening internally? How is the company functioning in the harmful then we would look at things like, you know, bribery, fraud, and corruption, executive remuneration, so how much is the CEO getting paid compared to employees? tax avoidance, so not just being smart about tax, but actually, you know, finding those loopholes and really avoiding tax that they shouldn’t be avoiding? And obviously, and, and even just greenwashing from a company perspective as well, is definitely in that harmful governance realm. As far as the positive governance goes, seeing more of a look at long term ism. So what is the board? Does the board take a long term approach? Are they looking at sustainability? Are they incorporating business model resilience, those types of things, more transparent disclosure, stakeholder engagement, you know, are they communicating and working with employees and communities and suppliers and customers? and indigenous consent is of a huge one in particular, who were on what we’re seeing with Rio Tinto as well. And Yukon gorge, you know, just yeah, just having companies that boards that have a positive impact when it comes to respecting indigenous consent are of course going to be seen as as being better or, or better in the ESG. room?

 

Fraser Jack 

Yep. Yeah, that we’ve just listed off, you know, a stack of different concepts when it comes to the the three different areas and let’s have Let’s call the six different areas, because there’s a negative and positive in each one, then how does the advisor then have that conversation with the clients? And we sort of you sort of touched on this in the previous episode, but there’s prioritization point of view where you say, Well, you can’t have everything Surely, if you have everything we’re gonna we’re going to visit, there’s not going to be any funds left to recommend, or any companies have to recommend? How do we have that prioritization conversation with the clients?

 

Alexandra Brown 

Yeah, so I guess there’s two two things I probably want to discuss here, Fraser. And the first is, you know, I get a lot of advisors, they’re asking me so well, there’s so many there, what do I What do I learn for a thing? And so from, from a, from a learning perspective, I guess, you know, fossil fuels and climate change risk there, they’re just the two big ones. And biodiversity actually, risk is becoming huge, too. But, you know, I’m a lover of research and stats, and I went to the the, it’s a consumer service survey by Maria, and in the report, it looked at, and this should be interesting for advisors, too, but the top three social and environmental issues or themes that Australian investors, so potentially your clients want to support our renewable energy and energy efficiency, sustainable water management, and use and healthcare and medical products. So those top three issues renewables, sustainable water, and healthcare. And the top three issues that they wanted to avoid in this report is animal cruelty, tobacco, and weapons. So you know, getting your head around these things is is clearly important to Australian investors. And the other report they had in their benchmark report, they actually used their, their responsible returns tool. There’s, there’s an advisor interface as well that you can go and you can check out all the certified products there. But people can go to their tool and put in things that they want to exclude and it shows them a list of products based on what they want to screen out. And the three most frequently used exclusionary screens, fossil fuels, human rights abuses, and armaments. So we have a, you know, it’s just, yeah, it will be different for this. As I said, there’s that three examples actually ethos, they did another one, too, they This was global, using that same system of taking data from from the screens that they that that they were using, which is the top causes that investors care about, number one, climate action, number two, sustainable resource use and number three, Gender equality. And it was really interesting to see that, you know, we got a social aspect in there as well, because they’re most generally it’s usually based on environmental.

 

Fraser Jack 

Yeah, that is that is fantastic. And he thought he mentioned ethos, which is, of course, a product that neither of us are endorsed by, by the way that that talks about or helps helps with that conversation or prioritizing. We’ve also spoken on some of the previous people that have talked about this around what, what what can be done with regards to the, you know, the questioning for clients, and there’s some there’s some stuff, obviously, from rear and from the card that talks about, you know, questioning techniques, what, what sort of what do you sort of talk to your clients when you’re training them and teaching them to use as that needs analysis? Or that, you know, that idea of understanding what the client is prioritizing?

 

Alexandra Brown 

Yeah, great question, Fraser. And, you know, for advisors, I’ve mentioned questionnaire a number of times, because I really would suggest that this conversation is done using a questionnaire that covers, you know, ESG concerns and what matters most to a client. And you know, just as a visors would obtain their clients risk profile, you know, they’re just going to find out their ESG, or their responsible investing profile. So alongside a questionnaire, then you’ve got, obviously the funds to the, the research providers. So I would try and match up the questionnaire with, with the product providers to make it easier for you. So, you know, you’re never going to find products that exactly match, you know, there’s there’s going to be issues that are important to your client that aren’t going to match the products. But what I’m seeing more of now is when you’ve got a questionnaire is using more of a ranking system when it comes to profiling your clients. So I know that we have mentioned ethos just one more time, but you know, on their platform, they do have a in the list of issues, the user can actually move them around, it’s like a ladder, and the client can actually move them around to work out, which is the most important and that would sit at the top, I provide advisors that I work with that I’m consulting with a questionnaire to that also uses a ranking style system, in that I would have all the ESG issues listed in that positive and negative to make it easier for advisor and client. And then 125. On the other side, where five is this issue is really important to me. And one is I’m not so fast about this issue. And obviously in between and as an advisor, if you go through with your client using this questionnaire, pay attention to those number five’s those issues that are really important to them are the ones that you want to focus on when you’re trying to match a product with their their values and their concerns.

 

Fraser Jack 

And that’s again, the whole idea of prioritization is to take that not everything can be a five, no,

 

 

that is correct. And you will get clients that will literally just take the fives all the way down. So

 

Alexandra Brown 

just to finish off, I’ve just got a couple of tips to help advisors with client disk ESG discussions. And the first one is, it’s okay to not have the answer. So it’s too hard to be an expert in all areas, it’s, you know, it’s not your job to be an expert in all things ESG, but just enough to form the structure of your advice. And just see this as a growth journey. Number two is that your clients will want to bring their expertise to the table. So if a client is particularly passionate about an issue, they are going to be a great source of information, they’re going to be a great resource for you. And they are going to want to bring their expertise to you three is that there’s no investment option that’s perfect. It’s really just a matter about being upfront and transparent around any issues that you might find. And then my fourth tip is just to review your client’s preferences regularly because they are likely to change over time.

 

Fraser Jack 

Yeah, fantastic. Thanks, Alexandra for coming on and, and going through that with us. That was really that was really great. I really appreciate it. And I look forward to catching you in the next episode when we talk about supply and demand. Thanks so much Fraser. James Howard, thanks for joining us again as we dig dive a little bit deeper into the E s orgy prioritization conversation. Welcome.

 

James Harwood 

Thanks, Fraser. Jack, good to be

 

Fraser Jack 

back. fantastic to have you now. So we’ve been tackling this concept of you know, let’s go through and have a look at what some of the environmental factors are the social factors that are important to both fund managers as yourself and also to clients. And as we go through there, we just are looking also around the prioritization of how we have those conversations. So let’s start with the the E, the environmental side of the things that what’s important for you in the space.

 

James Harwood 

Yeah, look, I probably focus on two things here. Phrase so either spoken in previous sessions about carbon emissions and carbon emissions data is actually really quite good now. So that’s something that we, we measure all of our funds at Russell, we measure the fund’s carbon footprint relative to its benchmark, both Australian and global shares. And similarly, in the, you know, the low carbon strategies that I run, they’ve all got specific objectives or specific productions that we’re looking to hit versus the benchmark. So that’s kind of a, I would say that speak, you know, fairly common theme that you’ll see in a lot of superannuation funds as well. The other area would, would be around green energy. So this is an area that that I find particularly interesting, clearly, you know, energy production is a is a big part of that carbon emissions, and the emissions that we’re releasing into the atmosphere every year, what we’re seeing is utility companies around the world becoming more green. And as a result, a few years ago, we developed a green energy ratio for a lot of these utility companies. And that, that, that that is a measure of how much of the energy they’re producing is coming from renewable sources. And I think we spoke in the last session about, you know, positive tilts. That’s an example of a positive tool that we use in our low carbon strategies. So we, we want to, we want to have more exposure to those companies that are producing more and more energy from renewables. And I might just think I also mentioned HCl, and how that that can be is, is separating into a green versus fossil fuel division. A good example here is a Danish utility called or stead. That was a, you know, fossil fuel based utility provided a few years ago, and over the years that I’ve been involved in ESG. Investing, we’ve seen awstats, green energy ratio, go from quite low numbers to well, in the 90s percent wise, and, you know, it’s a company that’s done, you know, really well relative to other utility stocks, and I think talks to the, you know, the, that’s where investors are positioning their, their positioning for these companies that are transitioning for the more sustainable and lower, lower carbon future.

 

Fraser Jack 

Yep. Now, when companies do that, this is a really interesting part because Because obviously, you know, you look at an AGM or not if they if they take their fossil fuels, and they divest that into a different company, that the the fuels are still being emitted, are they not as it’s still? Like, I mean, obviously, the money’s been diverted, for the green funds to the to the new entity and promoting that, and we’re assuming the old ones gonna die off over time and investment will run out.

 

James Harwood 

Yeah, there’s another metric a so called carbon reserves or fossil fuel reserves. And that’s the coal oil and gas assets that these companies have on their balance sheets that are still in the ground and yet to be mined. There is a belief that, you know, a lot of those will become so called stranded assets. Because of, you know, Paris commitments. We’ve got cop 26, which I’m sure we’ll hear more and more about, over the course of this year in November, where, you know, all governments from around the world are meeting again, on climate change. So I think the reality is that, you know, a lot of those fossil fuel fuel assets will become stranded and and won’t be mined and burned. So, yes, whilst whilst they have them on their balance sheet, many companies are either trying to sell them off, or simply write them down to zero, which we’ve seen as well. So yeah, it’s it’s certainly an aspect to be aware of, but yeah,

 

Fraser Jack 

I think what we’re really looking to do is is what we want to see is those companies positioning for the future. Yep. And this is a again, as you mentioned, in the previous episode, this is an influential position to be in, as you know, the investment manager, as well as investors as well as consumers to be able to implement some of these companies behave in the future. Yeah, yeah. Fantastic. Now, let’s talk about social the Yes. You know, the social impact and what can What are you seeing in that space with companies?

 

James Harwood 

Yeah, I think that’s, in a way, it’s a harder one to measure and manage, but definitely one that that is becoming, you know, more of a focus for, for consumers. And I think that that’s, you know, where engagement with with companies and then meeting with them and, and understanding their approach to social issues is more and more important. So probably a good example would be, you know, how if a company is transitioning how they’re managing the workforce that that might be displayed. So the concept of just transition. So you know, there’s many parts of Australia that rely on these kind of industries, trying to manage that, you know, that change of business model, while still supporting local communities is is, you know, obviously, it’s a fine balance to get that right. But yeah, in many instances, they’re also say, in the Hunter Valley, there will be, you know, farm like solar farms, and there will be jobs that get created in other areas. So I think that’s kind of one aspect of, you know, the social side of things from, you know, the environment, the the energy side of things. Other areas would be, you know, focusing on education and healthcare. And I think we can we can move portfolios into some of those areas that naturally have a greater focus on the social side of investing.

 

Fraser Jack 

Yep. And I kind of feel like in Australia, the with, obviously, with local government regulations, and, you know, we’ve we’ve sort of been in an economy that’s, that’s looked after the conditions of workers for probably a lot better than a lot of countries in our region. Is this something that we’re finding, you find that, you know, with, with the social side of this, that Australian companies are stronger than take some of the global companies?

 

James Harwood 

I think it’s, it’s certainly a, you know, it’s a bigger focus, you know, I think, partly, you know, some of the investor groups, they are looking for, you know, just transitions as well. It’s, I think it’s also supported by the government in that regard. So, whilst I don’t think our government is necessarily doing a fantastic job on climate change, you know, I think that there is a support for, you know, the, you know, the investors, sorry, the employees to really support them. And, you know, it’s a fine balance. But yeah, definitely, it’s a key part of the conversation for, for any, any company involved in that transition type of area.

 

Fraser Jack 

Yep. And we sort of covered off on governance, with some of the earlier episodes, we talked about that, obviously, governance has been around for a long time, it’s not a new part of this conversation. It’s always been there with with regard to, you know, investment managers looking at the governance of other business. But from your point of view, how do we start to prioritize over when we’re talking about an ESG? portfolio or green portfolio? How do we start to then try and work out how we can bring all three together or pro? Because Because often, they’ll be prioritizing one over the other?

 

James Harwood 

Yeah, look, you know, I think what you’re finding now is that the E s, G, you know, if you look at any company, you know, if you click on their website, there’s almost certainly going to be a link to their sustainability report or their governance report. So, it’s, it’s, it’s definitely not not an area that, you know, that they’re not mutually exclusive. I think that a lot of these things are tied quite closely together. governance, you know, the focus on proxy voting, how investors are voting has is never been, you know, it was great. So, you know, I think that that’s, that used to be a almost forgotten part of investing. But now, there’s a much greater focus on that. And then obviously, when we’re voting, you know, it’s across all of those areas. So I think it’s naturally becoming ESG is becoming a merge type of concepts. Particularly on the governance side and the voting.

 

Fraser Jack 

Yep. And when, when advisors are talking to their clients, how should they go about that conversation around? Looking at an individual client and, and and how they can sort of prioritize for that client around those ETS mg topics?

 

James Harwood 

Yeah, look, one one concept I’ve spoken about before is the responsible investment association of Australia. So all Ria is the shortened term. Ria is so they certify products, really more the ESG specific products. So you know, our ESG ETF Rory is certified by Ria as our our low carbon strategies, these all have specific ESG focuses and objectives. And the real website actually is a useful tool for advisors in that there’s there’s a tool that they can they can screen for, for products that match their requirements. So you know, both on the negative screens on the positive side. So that’s probably the best toolkit that I can suggest to advisors have a look at the real website and their certification tool. It can really help advisors identify products that match the requirements of their clients.

 

Fraser Jack 

James, thanks for coming on this episode. We look forward to catching you in the next episode where we get into the supply and demand conversation. I look forward to that.

 

James Harwood 

Thanks

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