The Point

Regnan: ESG engagement must evolve to better protect investors

THESE days it’s a basic expectation that active managers meet regularly with investee companies and issuers to drive behaviour that benefits shareholders and the community.

“Engagement”, as it’s known in the industry, is usually undertaken on a one-to-one basis between an investor and an investee.

For example, sustainable leader Regnan last year engaged with 40 ASX-listed companies, aiming to reduce economic, social and environmental risk to client portfolios.

You can download Regnan’s 2022 engagement report here (PDF).

As ESG increases in complexity it’s becoming clear that engagement must evolve into collaborative, systems-wide activity, says Regnan’s head of engagement Alison Ewings.

“Climate change is a classic example,” says Alison. “You can divest your way out of the risks to a certain point.

“But if left unchecked, climate change will still create risk in portfolios and potential for economic shocks.”

ESG: Why inclusion matters – even for astronauts

In 2019, NASA planned one small step for women: the first all-female space walk from the International Space Station.

But it didn’t go as planned.

The problem? There weren’t enough medium-sized space suits to go around.

“Truly inclusive decision-making goes beyond the workplace,” says Regnan’s head of engagement Alison Ewings.

“By broadening the approach to consider customers and society at large, you’re more likely to create products and services that meet the needs of a wider range of people.

“We’ve seen personal protective equipment the wrong size for women. We’ve seen machinery that cannot be operated by people under a certain height.

“These are decisions made well before a company discusses how to implement a diversity and inclusion program.”

ESG: Why investors need a new way to engage with companies

Engaging with investees is at the core of sustainable investing.

But the ESG-related issues facing companies are now so complex that investors need another approach, says Regnan’s Alison Ewings.

Company-specific engagement remains important for driving direct outcomes, says Alison, who heads up engagement at sustainable investing leader Regnan.

But many aspects of meaningful change can only come when businesses, not-for-profits, researchers and governments share information and co-ordinate action, she says.

Agriculture is a case in point, with complex sustainability issues across the value chain including climate change, soil health, pollution, water scarcity, food waste and biodiversity and eco-system loss.

“A system-wide approach is going to be required in order to change complex value chains which stretch across our entire economic and social system.”

Regnan last month hosted its first   Director Roundtable on Sustainable Agriculture, bringing together senior executives and directors to identify barriers to sustainable agricultural and food production.

ESG: A simple approach to net zero for investors

Assessing climate risk in a portfolio can be a daunting proposition.

There’s a bewildering array of net zero frameworks, says Alison Ewings, who heads up engagement at sustainable investing leader Regnan.

The Net Zero Asset Managers Initiative, the Paris Aligned Investment Initiative’s Net Zero Investment Framework and the Science Based Target initiative for Financial Institutions are just three.

But understanding the frameworks is not as complicated as it looks, Alison says. There are three activities at the heart of all these protocols, she says:

1. Decarbonisation of portfolios and moving away from emissions-intensive activities
2. Directly investing in climate solutions that reduce emissions
3. Stewardship, ie influencing companies to become Paris-aligned, factor climate considerations into voting and support public policy that addresses climate risk.

“Unless the way you’re approaching net zero is aimed at bringing about meaningful change in the real economy, you’re not actually reducing your long-term risk at all,” says Alison.

Emerging markets: take care when choosing Asian tech stocks right now

July was a strong month for emerging market equities, with the MSCI EM index returning 6.2%.

Not surprisingly, the strongest gains were in the tech sector — especially stocks with exposure to electric vehicles or artificial intelligence.

While these upward moves could continue, Pendal’s EM team sees “multiple signs that there may be excessive optimism in some of these stocks”.

For example, in Korea, EV and battery stocks represented nearly half of stock market turnover on some days in July, driven by retail investor leverage rising to a record 10 trillion South Korean won.

Chinese EV maker XPeng rose 74% in July, despite expectations it will lose $1.2 billion on $4.5 billion in sales. Meanwhile, some high-quality, large-caps with proven track records and technologies were laggards.

“Some parts of the EM equity space look particularly inefficient right now,” says the team.

Emerging markets: Stimulus unlikely but China opportunities remain

China is struggling with a slowing economy – leaving markets searching for signs of stimulus from Beijing.

Despite some recent market excitement, a quick stimulus package is unlikely, says Paul Wimborne, co-manager of Pendal Global Emerging Markets Opportunities fund.

“We think the key priority for the Chinese government remains building long-term economic and financial system resilience and growth hasn’t yet fallen to the levels that would lead them to aggressively stimulate.

“We think they will continue to push through mini stimulus measures in certain areas where they would like to encourage growth — but we don’t think they’re at a point where we’ll get a big stimulus plan.”

Still, there are opportunities to be found for investors.

“There are parts of the economy we are happy to get exposure to — and parts that we would like to avoid,” says Paul.

Emerging Markets: What’s driving Indonesia’s resurgence

Indonesia’s economic outlook has been attracting the attention of investors recently.

Why so?

Pendal’s Paul Wimborne says an improved trade balance on strong exports of commodities like palm oil, coal and nickel is paving the way for a resurgence in domestic demand.

“Indonesia is at that sweet spot in the cycle where the export side of its economy is doing well, the currency has the potential to go stronger, and domestic demand – which has been subdued for 10 years – looks like it could pick up.”

South-east Asia’s biggest economy is also benefiting from a government push to encourage more manufacturing and reform labour markets, says Paul, who co-manages Pendal Global Emerging Markets Opportunities fund.

Paul’s preferred exposure to Indonesia is via companies that benefit from rising domestic demand, such as banks, retailers and auto dealers.