Crispin Murray: why responsible investing matters in 2021
PENDAL’s head of equities Crispin Murray has direct access to very senior levels of ASX-listed companies.
In November, Crispin was invited to address the region’s biggest gathering of responsible, ethical and impact investors at the Responsible Investment Association Australasia’s RI Australia 2020 conference.
In this short presentation Crispin outlines:
- How 2020 has emphasised the importance of responsible investing
- How he thinks and acts on Environmental, Social and Governance (ESG) matters as an active fund manager and steward of capital
- His observations on engaging with companies about ESG matters
View an edited video of the presentation above or read the transcript below.
Simon O’Connor, Chief Executive of the Responsible Investment Association Australasia:
Crispin you have a long history looking at ASX-based equities. I’m fascinated to hear your view on the year.
Crispin Murray, Head of Equities, Pendal:
Thanks for the opportunity. I’ll focus on three things. One is to give you my thoughts on what’s changed this year — and it’s been an enormous amount.
The second thing is to give you a snapshot of how an active fund manager thinks and acts on Environmental, Social and Governance (ESG) matters. And then some observations on what we’re seeing when we deal with the companies that we invest in.
What changed in 2020
First in terms of what’s changed, the pandemic has really brought attention to how existential risks are real. They can happen when they happen they have a dramatic effect. That’s across a number of areas, but from an equity market point of view you’ve seen huge divergence.
You’ve had clear losers and you had clear winners. I think that’s brought home how you need to not just understand where these risks are, but what are the consequences of these risks.
One of the lessons to come out of this is that when we think about investing and sustainability, we need to think about it from a risk management point of view.
We don’t actually have to prove that responsible investing is always going to beat more generalised investing. What you need to show is that in certain scenarios, that is the thing that could be protecting your portfolio.
That was a very interesting outcome from the pandemic.
Lack of resilience
Another feature of the year is that it’s really demonstrated a lack of resilience within economies, societies and within companies.
This tag that I think [former US treasury secretary] Larry Summers came up with is that we were moving from a just-in-time world to a just-in-case world.
I think that requirement to understand building in resilience to your business models is a really big imperative.
The final thing I’d say is it’s been an acceleration of some of the big themes that we’ve seen over the last few years.
Digitisation, the move online and ESG are are themes that have been supercharged by the lessons from the pandemic. So that’s one set of issues.
I also think globally, geopolitically, we’ve seen some very important developments.
First of all we’ve seen China commit to a net zero target. While it may be a long way out, you can already see some of their policies that have been put into their latest five-year plan, which are very much linked to that long-term target. So I think that’s a strong signal.
On top of that clear, clearly we’re seeing in the US a shift towards the Biden administration, which I think will put in a renewed effort.
So I think there’s a very strong signal globally that a lot of companies are seeing and receiving.
Then the final thing I’d point to is this year’s local events.
There’s [the events of Rio and] Juukan Gorge, we’ve had the situation at AMP. There have been situations that have really demonstrated that if you’re not managing ESG risks well, it has significant impact on companies in terms of how they’re managed and the way investors perceive them.
How we think about ESG today
In terms of how we as investors think about ESG, Pendal’s very fortunate.
We’re a large fund manager. We have $17 billion invested in the Australia market.
That gives us a very important responsibility, which is to engage on behalf of our clients and to use that influence in a positive way.
We’re also fortunate we have a lot of resources. We have 19 people in our Australian equity team. We can also draw upon our colleagues at Regnan who have a team of eight dedicated to doing a lot of research in these matters. And then we have a responsible investing team.
So the resources dedicated to ESG matters has really multiplied in the last few years.
I think what’s shifted is, we’ve always been aware of ESG risks. Our job is about risk management contingency planning.
But the awareness is that these issues and these risks are far more material now and far more significant in terms of the consequence for our portfolios.
In addition, I do also believe that one of the big trends that we’ve seen over the last 25 years is the shift to passive [investing].
Part of that has led to a significant reallocation of resources towards more momentum, more growth-orientated stocks.
I think the next 20 years is going to be about people investing in sustainability-orientated portfolios. Even the managers who are not in those dedicated funds [will] have a greater and greater overlay of that in their investment decisions. In terms of a cost of capital outcome, there’s going to be a very material consequence.
So companies that do not deliver and are not seen to be managing these risks, are going to see their cost of capital rise. They’re going to see their ratings on their stocks fall. And they will not be allocated capital.
Markets are very efficient in terms of determining where they want capital to be allocated. We’ve seen that with growth stocks more recently. I think we’re going to see that increasingly with people’s allocation towards people who are not managing those risks properly.
So when we think about our investments, we think about it both from the perspective of the industry —what are the risks to that industry? what are the longer term trends? — and then how within the company, they are thinking about and managing those risks.
And we rate those companies. So we have a formal process of rating those companies on our own metrics, and we use the Sustainability Accounting Standards Board (SASB) framework to help guide us in what are the key things to focus on.
The importance of engaging with companies
The other element of what we do — and probably the most interesting and the most challenging — is we’re very much at the front line.
Our job — having done the analysis and having listened to perspectives from our investors — is to actually go in and meet these companies and raise these issues.
These are often quite uncomfortable discussions. That’s the nature of our job and that’s what we do.
I’m not expecting much sympathy on that front, but it’s worth highlighting.
You can often go into a meeting and the first part of the conversation with the chairman is ‘we don’t think the executives’ pay is aligned with shareholders, there’s a disconnect here, we need you to reassess that’.
Then we need to talk about how you’re managing your ESG risks and why you’re not thinking strongly enough about your targets on scope two and how you think about scope three and what what actions that you’re taking.
Then you may move on to a discussion about diversity within the organisation and what’s going on.
Keep in mind you’re dealing with people who, for most of their lives, are having people responding to them — they’re the ones directing everyone else.
In the last few years there has been a shift from ‘I’m not really used to people telling me what I need to change’ to an awareness that ‘okay, now I need to embrace this a little bit more’.
But there’s clearly still some resistance to that. That’s part of this process.
On one end of the spectrum there’s an understanding of where society needs to go [and] how economies need to transition to a more sustainable future. But then there’s still a traditional mindset that ‘well, we’re companies, we’ve got to focus on our returns and we’ve got to think about the real issues in front of us now’.
I’m not saying either end of that spectrum is wrong. What we need to do is meld those together so people can see they are actually intertwined.
So a lot of what we do is informing and discussing and trying to share perspectives with companies over these matters.
What we’re seeing when we meet with companies
That takes me to some of the observations we’ve made over the last couple of years within companies.
The first point is that everyone actually understands risks. I don’t think there’s a debate about whether there are issues that we need to be thinking about and taking care with.
The discussion is about the degree to which those risks are real and tangible in any reasonable timeframe.
That’s the push-back that we get. But I do think Rio with Juukan Gorge is a very seminal moment. Understanding community relations and working with the traditional landowners was something a company probably never thought would lead to the CEO and two senior executives being removed if they got it wrong.
That clearly was a risk that was underestimated by that company. That is a very stark lesson for all companies.
That’s one of the areas that’s being reassessed and needs to be continually discussed and highlighted with these companies.
The second thing is the interesting debate about the reporting versus the outcomes on ESG matters.
Both are very important but my observation is there’s an element now where companies feel that by delivering on the reporting side — giving the past — that’s showing that they’ve done their job.
Then I actually think about the point of the reporting and what we’re actually trying to achieve here and what are the outcomes.
We certainly want to emphasise — what is it that a company can do specifically? How can they make a dedicated change rather than just signing off on a series of targets that are not necessarily going to achieve a lot in a good timeframe.
If you take the mining sector, it’s going to be very difficult for the iron ore companies, for example, to push a lot of their customers such as the Chinese steel companies to embrace some of the measures that perhaps they should be embracing.
But what they can do is sit down with their suppliers of trucks and diggers and so forth and put a lot of pressure on them to transition away from diesel towards alternatives such as hydrogen or electric vehicles.
So we’ve been encouraging our companies to think about not just the reporting (you’ve still got to do that) but also the tangible things where we have a point of leverage to deliver a material outcome in a good timeframe.
Amcor as an engagement case study
Another company we’ve had a lot of discussions with is Amcor.
Amcor is an interesting company because it’s in a very controversial area — single-use plastics.
But it also has the potential to drive technology improvements and infrastructure that can lead to recyclable, reusable, combustible packaging becoming pervasive in our consumption habits.
We believe it’s really important to encourage them to realise that by doing something — and I believe they are doing something about it — that will help the rating of the company and their cost of capital.
And if they don’t do enough about it, it’ll actually go the other way.
So there’s a much more binary outcome in terms of their decision-making.
The carrot or the stick
That also leads me to this issue of the carrot and the stick.
I do believe that generally to motivate people and motivate companies, you need to not only tell them the consequences of not doing something and the penalties that will come. You also need to provide them with an incentive.
I think that’s where the market’s price action, the way that markets are rating companies is actually a very valuable tool in sending that signal and providing an incentive for companies.
In addition I think there’s enormous amount of opportunities. We’ve spent a lot more time recently thinking about the opportunities that are presenting themselves with this transition in the economy.
Going back to the pendemic, the companies that were able to help facilitate remote work and online shopping have had huge returns for investors.
So if you’re talking to a company you can say, ‘think about the opportunity, where can you tap into these trends and how can you actually take advantage of them and deliver a positive outcome?’
Intertwinment of E, S and G
The final observation I’ll make is to really reinforce this point about the intertwinement of the E, the S and the G [Environmental, Social and Governance issues].
When I speak to companies I see a parallel to what we’re seeing in broader society. There’s a group of people who are very much on board with the need to transition the economy. But there’s also still people who realise that they’re probably near-term losers from that transition.
That’s why the ‘S’ is so important.
We need an economy that is able to create industries that create new jobs, create wealth and enables us to transition quicker.
In terms of our portfolios the message we’re giving to companies is we’re really looking for those companies that help deliver on those other aspects of ESG, and are able to help facilitate the transitions that we’re seeking to achieve.
Simon O’Connor (RIAA): Crispin, you have quite unique access to very senior levels of Australian companies. We’ve seen something of a revolution on the investor side around ESG issues which you talked about. Are you saying the response at the leadership level in boards and among executives you speak to is responding and upskilling and building capability and knowledge quickly enough in your view — as a broad observation across the ASX?
Crispin Murray (Pendal): Yes the first thing I’ll say is, there’s an enormous emphasis across the board on these matters. Certainly we are through the stage of people dismissing this as an issue.
The challenge now is the output. I will sit down in some situations and we’ll literally have a 40-page deck, and it will just go through a whole bunch of things that companies are doing. But you get the sense sometimes that this is a case of ‘let’s just create lots of examples of all the things we’re thinking about’. But there’s no common theme or purpose as to what they’re trying to achieve.
The targets have created a mindset which is: ‘as long as we’re answering and delivering on these sorts of KPIs, we’re doing what we’re supposed to be doing’.
Getting people to actually think about the ‘whys’ is really important.
The other observation is it’s a lot easier for large companies to do this than small companies.
One of the things I worry about is that when you look at some of these third-party rating services, they’re penalising smaller companies because they haven’t got the reporting levels that larger companies have.
[Smaller companies] need to raise their game, and that’s a message that we give to them. But in many cases we think there’s a disconnect between the perception and the reality of these companies.
We want to try and find the right balance between, having companies feeling that they have to dedicate resources just to apply reporting standards that work for a global perspective versus if there’s one area of your business that you can really facilitate a change. We’d certainly encourage them to focus on that and work more on that front.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
He manages a number of our flagship funds along with one of the largest equities teams in Australia.
For more information, please contact Pendal’s Head of Responsible Investment Distribution Jeremy Dean at Jeremy.Dean@pendalgroup.com.
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