The Point

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

ESG investing: how to understand, measure and mitigate

Underperformance in some sustainable strategies may leave investors hesitant about ESG from time to time.

But research from Pendal’s multi-asset team suggests ESG investment risks can be quantified and mitigated – and in the long run, a sustainable approach is likely to outperform.

“Investing sustainably is the right choice in the long term,” argues Michael Blayney, who leads Pendal’s multi-asset team.

“But investors need to understand how much and for how long their performance could differ from unscreened portfolios – and be comfortable with that,” he says.

Pendal quantifies the level of risk inherent to ESG portfolios by comparing the tracking error of representative ESG indexes with unscreened indexes over eight years.

Tracking error is a measure of how closely a managed fund tracks its benchmark index.

The data suggests ESG funds deliver “something like half the risk you would get from an active manager, simply from negative screening”.

Michael Blayney: How to take a multi-asset approach to sustainable investing

ESG: How the world’s most innovative companies are using AI to drive sustainable outcomes

Regnan: Make sure your sustainable investments manager is a good ‘engager’

It’s no surprise that corporate engagement and shareholder action have become one of the most common responsible investment approaches in Australia.

Engagement generally refers to the process of active asset managers “engaging” directly with investee companies and bond issuers to influence corporate behaviour and achieve better outcomes for investors and the community.

More than half of investment managers in our region now have stewardship codes (which generally include an engagement component), according to the Responsible Investment Association of Australasia.

Engagement is a critical component of the investment process for sustainable investor Regnan – and senior analyst Laura Sheehan sees it as an essential tool.

“We need to be able to identify companies that are willing to engage with us,” she says.

Engagement is a two-way relationship, and the key is to have a deep understanding of the business and the industry in which the company operates.

“If you’re asking for things that aren’t realistic, or show you don’t understand the business, that’s going to impact your influence and the willingness of management to engage more broadly.”

Laura explains more here