Public still lagging private markets for ESG, say super funds
Two superannuation funds in New Zealand and Australia have said that private markets continue to offer superior ESG opportunities over public ones, particularly when it comes to the quality of reported information and opportunities for investor engagement.
“For direct assets you can build out the [ESG] measures,” Anne-Maree O'Connor, head of responsible investment, at New Zealand superannuation fund NZ Super told AsianInvestor.
“With equities you have thousands of companies [to cover]. It depends what they disclose and what research is available from third parties, or via media reports,” she said, noting the amount and quality of information varied considerably.
Fiona Mann, head of listed equities and ESG at LGIAsuper, told AsianInvestor that the illiquid nature of the assets and longer tenures of investment had driven reporting in real asset markets ahead of that in public markets.
“It makes sense given that disclosure around sustainability in areas such as water, waste and power management has been undertaken in real assets for longer than other asset classes, resulting in general standards being of a reasonable quality,” she said, adding that the fund required managers of real assets to report under the frameworks of GRESB, Green Star and NABERS, an initiative managed by the NSW government on behalf of Australia’s federal, state and territory governments.
ENGAGEMENT
O’Connor also pointed to better engagement opportunities through privately owned assets.
“A lot of this has to do with governance: getting the right board to influence [change]. The closer you are, the greater the influence, which can be targeted on [identifying] risks and [improving] disclosure,” she said.
Mann gave an example of tenants in a shopping centre owned by the fund.
“If there was a tenant that was in the bottom quarter of their peer group [on environmental engagement] – and I wouldn’t expect that to happen – we would expect to work with our managers to encourage that tenant to improve,” she said.
Outside of Australia, European property has the sector’s best standards in sustainability, typically thanks to long-established rules from local regulators, said Mann.
“Many European frameworks and policy decisions have been in place for the last ten years at least,” she said, adding that the fund nevertheless required managers to be leading performers in their sectors on ESG.
Equities engagement
O’Connor said that NZ Super continued to expand the range of external companies it worked with to improve both reporting and engagement on ESG.
“We use consultants for direct investments and [for listed investments], as well as service providers for engagement [in listed investments] including voting engagement and research,” she said.
NZ Super uses MSCI as its main rating agent; it uses BMO (which was acquired by Colombia Threadneedle in November) for general engagement and ISS for specific voting engagement.
Manager monitoring
O’Connor pointed to improvement on the part of managers in sectors that had traditionally lagged on ESG reporting such as global macro, singling out US manager Bridgewater Associates as an example.
“They have considered how they can respond to clients who want better ESG while delivering the same kind of financial attributes they are looking for,” she said.
Within New Zealand, the Sustainable Finance Forum had provided an important spur to improving performance on the part of managers, she added.
“I would say that fund managers are providing a depth of knowledge in this area; a number of managers have up-skilled,” she said. Whereas a few years ago if the fund was considering a new type of investment, there might be one candidate manager who met the fund’s ESG standards, today there were typically two or three.
O’Connor said the fund had recently employed independent experts to support FarmRight Investment, the investment manager that NZ Super has used for its agricultural portfolio since 2010.
“Recently we wanted to up the game, so we brought in experts on agricultural sustainability, on reducing emissions and on water,” she said.
This was part of wider efforts to improve ESG performance in the fund’s agriculture portfolio, a large constituent of its NZ$9 billion allocation in New Zealand. This includes a large dairy component. Livestock are a large source of methane emissions which is difficult to reduce, she said; the fund was therefore diversifying into horticulture.