does esg investing come at the expense of returns?
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Does ESG Investing Come at the Expense of Returns?
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Disclaimer
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Issued by: The Investment Manager, Perennial
Value Management Limited, ABN 22 090 879 904,
AFSL: 247293. Responsible Entity: Perennial
Investment Management Limited ABN 13 108 747
637, AFSL: 275101.
Whilst every effort has been made to ensure that
the information in this presentation is accurate; its
accuracy, reliability or completeness is not
guaranteed. Perennial expressly advises that it
shall not be liable in any way whatsoever for any
loss or damage which may be suffered by any
person relying upon such information or any
opinion, analysis, recommendation or conclusion
contained in this presentation or otherwise arising
in connection with the content of, or any omission
from, this presentation.
The fact that particular securities may have been
mentioned should not be interpreted as a
recommendation to either buy, sell or hold those
securities.
The contents of this presentation were prepared
for information purposes only. Accordingly,
reliance should not be placed on this presentation
as the basis for making an investment, financial or
other decision. This information does not take into
account your investment objectives, particular
needs or financial situation.
Past performance is not a reliable indicator of
future performance. Gross performance does not
include any applicable management fees or
expenses. Net performance is based on
redemption price for the period and assumes that
all distributions are reinvested. Fees indicated
reflect the maximum applicable.
Contractual arrangements, including any
applicable management fee, may be negotiated
with certain large investors. Investments in the
Trusts must be accompanied by an application
form. The current relevant product disclosure
statements, additional information booklets and
application forms can be found on Perennial’s
website www.perennial.net.au.
Damian CottierPortfolio Manager & Senior Equities AnalystB.Com, LLB, CFA
Emilie O’NeillESG & Equities AnalystB.Com / B.SC (Fin and Psyc), FSA Credential Holder
Our Sustainability Team
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ESG is Capturing Headlines
4Source: Sydney Morning Herald, Australian Financial Review, Money Management
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Sustainability is a Growing Investment Strategy
5Source: Morgan Stanley Sustainability Primer Presentation with data from GSIA 2018
Perennial Value Management Limited – Proprietary and confidential
Sustainability AUM as a % of total managed assets
Sustainability is a Growing Investment Strategy
6Source: Macquarie Research, 23 April 2020, ESG in COVID-19: Win, Lose or Draw?
Perennial Value Management Limited – Proprietary and confidential
Sustainability is a Growing Investment Strategy
7Source: Morgan Stanley Research: Sustainable Investing: Quarterly Tracker: April 8 2020
Perennial Value Management Limited – Proprietary and confidential
“ESG” Google Searches
- ESG investing considers how a company is performing, improving or how seriously it takes, the environmental,
social and governance aspects of the company’s operations
- Investing in this way allows you to “do good” while “doing well”
What is ESG?
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Types of ESG Investing
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Source: RIAA Benchmark Report Australian, 2019
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UN’s 17 Sustainable Development Goals (SDGs)
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UN’s 17 Sustainable Development Goals (SDGs)
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ESG IntegrationE
SG
&E
Sco
re • The ESG&E score is a
proprietary scoring
system set up and run
in-house by the
Perennial sustainability
team with input and
insight from the sector
analysts. Each
company is given a
score for Environment,
Social and Governance
performance as well as
a score for company
engagement.
En
gag
emen
t •Engagement with
companies to discuss
material ESG issues,
risks and opportunities
Pro
xy
Vo
tin
g • Perennial should vote
on all company
resolutions considered
at general meetings
where it has the voting
authority and
responsibility to do so,
regardless of the
materiality of the
resolution.
Active Management
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Stock Ranking
ASX300 - Passive SFT - Active
Negative Screening
Actively invest in “positive” stocks
Improve outcomes through active
engagement
Invest mainly in innovative small companies
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How Does ESG Impact Investment Returns and Business Models?
Returns & Performance
1. Stock Returns
2. Cost of Capital
3. Volatility
4. Material Business Risks
5. Investor Focus
Sustainable Business Models
1. License to Operate
2. Consumer Demand
3. Staff Outcomes
4. Competitive Advantage
5. Regulation
Research and Studies on ESG Investing
Morgan Stanley Institute for Sustainable Investing (2019)
Responsible Investment Association Australasia (RIAA) Benchmark Report (2019)
The Journal of Portfolio Management (2019)
CPA Australia (2017)
MSCI (2017)
Research from the Harvard Business School (2015)
Lower
downside risk
& volatility
Lower
systematic &
idiosyncratic
risk
Less ESG
Controversies
Lower cost of
capital & higher
valuations
Higher returns
& profits
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How Does ESG Impact Investment Returns and Business Models?
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Quintile 1 ESG rated companies have:
• higher P/E
• higher P/BV
• higher gross profitability
Source: Macquarie Research, Quantamentals: ESG finding the Glove that Fits, 23 April 2020
Perennial Value Management Limited – Proprietary and confidential
Sustainability Performance During COVID-19
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Past performance is not a reliable indicator of future performance
Source: Credit Suisse Research, MSCI, Thomson Reuters Datastream
Data to 14th April 2020
-25%
-20%
-15%
-10%
-5%
0%
All country world Europe China USA
ESG Leaders Index Broad Market Index
YTD Performance (Absolute)
Australian Sustainability Performance
18Past performance is not a reliable indicator of future performance
Source: Morningstar, as at 30/04/2020
Why Does it Work?
Water management and supply
Industries at risk of disruptionIndustries set to benefit
Renewable energy
Low carbon technologies
Education
Oil and gas
Casinos and gambling
Alcoholic beverages
Tobacco
Processed foods
H I G H E R G R O W T H & L E S S V O L A T I L E
Forestry and logging
Healthcare Coal Operations
L O W E R G R O W T H & M O R E V O L A T I L E
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Why Does it Work?
AMP & The Royal Commission Whitehaven Coal & drought conditions
Newcrest BHP & Samarco mine
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Climate Risks and Opportunities?
IAG (ASX:IAG) & AUB Group (ASX:AUB)
6.00
6.50
7.00
7.50
8.00
8.50
9.00
09/19 10/19 11/19 12/19 01/20 02/20 03/20
IAG
10.00
11.00
12.00
13.00
14.00
09/19 10/19 11/19 12/19 01/20 02/20 03/20
AUB
Why Does it Work?
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Stock COVID-19 Update
Genetic Signatures (ASX: GSS) Modified testing kits to detect COVID-19
Janison Education (ASX: JAN) Online assessment & learning solutions
Mesoblast (ASX: MSB)Approval for products to treat COVID-related
ARDS; 75% success
Starpharma (ASX: SPL)Product ingredient has anti-viral activity
against COVID-19
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Small Caps and ESG
1. Innovative solutions and technologies
2. Providing capital to support growth
3. Greater opportunity for engagement
4. Support for smaller listed company sustainability teams
5. Avoiding large cap stocks with sustainability issues
ESG Stocks on the ASX
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Reducing GHG Emissions
Dairy company
targeting efficient
farming practices that
significantly reduce
GHG emissions
NZ energy company
producing 100%
renewable hydro
electricity with large
market share
Early-stage – carbon
dioxide capture
technology to
reduce CO2 in
cement and lime –
partnering with
European cement
industry
Mature NZ energy
company producing
100% renewable hydro
and geothermal
electricity with large
market share
A growing
Australian
renewable energy
company that is
focussed on the
corporate and
industrial
customers
Portfolio of solar
energy plants
across Australia
and the US
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Renewable Energy on ASX
Perennial Value Management Limited – Proprietary and confidential
Based on the renewable assets of our portfolio holdings as at December 2019; Statistic according to the Climate Council
Solar
~1,000 MW Capacity
1 MW powers ~300 homes
Solar
Hydro
Energy storage
Wind
~4,500 MW Capacity
Wind
Hydro
Geothermal
~500 MW Capacity
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Waste
management
company focused
on improving
sustainability in
operations such as
its energy-from-
waste projects and
organic treatment
facility
ESG Stocks on the ASX
Outdoor apparel and
equipment retailer with
focus on sustainability.
Largest Australian &
New Zealand company
to be a certified “B
Corp”
Plus sized clothing
retailer focused on
body positivity and
‘living wage’ in its
supply chain
Community
focused bank
providing
banking services
for regional
customers
Creates affordable
communities. Has
made improvements
on their supply chain
and installed solar
panels in their
communities
Private health
insurance
company working
to improve its ESG
outcomes
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Source: Perennial Value Management. Perennial Smaller Companies Sustainable Future Trust inception date is 1 February 2018. Past performance is not reliable indicator of
future performance. Net of fees performance shown.
Perennial Value Management Limited – Proprietary and confidential
Performance: Sustainable Future Trust
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Period to 30 April
2020
1 Mth
(%)
3 Mth
(%)
1 Year
(%)
2 Year
(% p.a.)
Since Inception
(% p.a.)
Perennial
Smaller Companies
Sustainable Future
Trust
16.4 -17.3 -3.1 3.4 3.7
S&P/ASX Small
Ordinaries
Accumulation Index14.3 -19.0 -13.3 -3.6 -3.0
Value
Added/Detracted +2.2 +1.7 +10.3 +7.0 +6.7
Sustainable Future Trust Outperformance
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Performance as at 30th April 2020
Source: Perennial Value Management. Perennial Smaller Companies Sustainable Future Trust inception date is 1 February 2018. Past performance is not reliable indicator of
future performance. Net of fees performance shown.
Perennial Value Management Limited – Proprietary and confidential
83% 83% 83%
63%57%
69%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% total months outperformed % months outperformed when
benchmark up
% months outperformed when
benchmark down
Outperformance in Up and Down Markets
Last 12 months Since Inception
• No trade-off between ESG investing and returns
• Increasing evidence that you can generate better returns from ESG investing….
• With lower volatility
• While making a positive contribution
Perennial Smaller Companies Sustainable Future Trust
Conclusion: You Should Consider Investing Sustainably
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