Environmental, social and corporate governance factors “are not separable from the broad considerations of investing”, Durack told FSA.
Schroders has an 11-person ESG research team, which identifies and analyses risks and opportunities. A portfolio manager uses the proprietary research as well as third-party ESG ratings in portfolio management decisions, he said.
Investment managers have generally moved away from the exclusion approach to ESG, in which companies are screened out based on negative criteria. Instead, the ESG considerations tend to be a part of the broad investment process and may include shareholder activism, which was once the domain of hedge funds.
“We advocate engagement,” he said. “If we find through our proxy voting processes that we have disagreements, or we find that it may be against shareholder interest for a company to be pursuing some policy, then we’ll engage and try to exert influence, for example, through voting.”
While instances of fraud have prompted some to question the value of the ESG label and the integrity of the ESG concept, consideration of a company’s governance and risk management practices are important factors in establishing trust, Durack argued.
“We look at the composition and the quality of the boards, and of the management,” he said. “There’s always going to be risk. Insisting on good governance practices means that we are mindful of those risks, call them out and require behaviours that move companies toward best practices.”
However, he did not say in what ways the ESG governance screening fills gaps that are presumably in the best practices of traditional due diligence screening.
Can ESG be quantified?
An approach to sustainable investing among investors is evolving, Durack noted. “People are moving away from the idea of sustainability being in one bucket from which to choose toward the view that everything I invest in ought to be addressing the risks toward the long term.”
Institutional investors are looking for demonstrations of how ESG risk issues are managed, he said.
“Those areas of awareness have increased, but their reflection in investors’ portfolios still has some way to go, especially when you look at retail data, and in particular data in Hong Kong compared to the region and across the globe,” he said.
Quantifying the effect of ESG integration into the investment process is difficult for several reasons. One is that there are many approaches to ESG. He said his firm’s approach is not rules-based, but a part of fundamental research and risk assessment.
Another reason is that ESG factors carry different weight for each investment strategy. Attributing stock performance to ESG policies as a whole is “too broad”, Durack said, explaining that ESG is only one factor in evaluating the long-term profitability of a company.
