Lonsec Research has found many Australian equity fund managers tend to rank higher than their global peers when it comes to incorporating environmental, social and governance (ESG) factors in their investment decision.
According to Lonsec Research’s newly released Responsible Investment Sector Review, 58% of active Australian equity funds achieved a pass mark (‘moderate’ rating or higher) on an ESG basis, compared to only 46% for developed market active global funds.
“We wanted to get an understanding of how active equity managers outside of the Responsible Investment sector are incorporating ESG in their investment decisions,” said Lonsec Research Senior Analyst Steve Sweeney. “Even though many funds are not specifically targeting the responsible investment market, many funds do look at ESG factors when selecting shares. Our research shows active Australian equity managers tend to do better in this area than overseas managers, and this is reflective of a growing local interest in responsible investing in recent years.”
However, while Australian fund managers have generally performed well, very few funds were able to achieve the highest ESG ranking, and 21% of funds were rated ‘low’, showing that more work is required for funds looking to incorporate ESG factors in their investment decisions.
“Australian equity funds certainly look to be adopting ESG assessment into the investment decision,” said Sweeney. “Overall, it is an encouraging trend and supportive of the long term alpha opportunity from ESG analysis. But of course there are always opportunities for funds to improve their ESG focus.”
Measuring ESG
Lonsec Research’s ESG Biometric rating provides a graded rating between ‘high’ and ‘low’, indicating Lonsec’s assessment of the degree of ESG awareness practiced by the investment manager in their management of the product. Lonsec provides ESG ratings on over 400 Australian and global equity funds.
As Lonsec Research’s analysis shows, Australian active managers have performed relatively well, with 57.4% of managers receiving a ‘moderate’ or ‘moderate/high’ rating, but only 0.6% receiving a ‘high’ rating. In contrast, global active managers tend to be less ESG conscious, with 45.5% receiving a ‘moderate’ or ‘moderate/high’ rating, 38.1% receiving a ‘low’ rating, and no funds receiving a ‘high’ rating (see table below).
“The rating takes into account a number of factors that are designed to gauge how seriously the manager takes ESG and how it is implemented,” said Sweeney. “For example, does the fund manager have an ESG Charter or Responsible Investment policy that governs the investment process? Do they implement ESG analysis and does this flow through to their conviction or valuation? Do they seek alpha opportunities based on ESG factors? These all impact on the overall rating.”
Responsible investment strategies pay off
Australian Responsible Investment equity funds researched by Lonsec returned an average of 1.0% over the past year, and 9.1% over the past five years, compared to the S&P/ASX 300 Accumulation Index returns of -5.8% and 5.4% respectively (see table below).
“The merits of including ESG analysis in the investment approach have gained broad acceptance among investment practitioners,” said Sweeney. “We have reached the point where it is rare to find an Australian equities manager that completely ignores ESG factors within their investment approach. Indeed, the performance of the Responsible Investment sector speaks for itself.”
