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We’re drowning in ESG Research and we need more! The ESG Research Australia 7th Annual Awards

Today, 50,000 companies are annually subjected to ESG evaluations by 150 ratings systems on approximately 10,000 metrics according to MIT Sloan Management Review (see here).

 

This certainly rings true for the Australian market, where over 190 pieces of ESG broking research by 10 broking firms were listed for nomination in the ESG Research Australia ESG broking awards.

 

In addition to broker research:

  • There is ongoing growth in market prominence of ESG research houses such as Sustainalytics, MSCI, CAER and Regnan;
  • There are proxy advisory firms such as CGI Glass Lewis and ISS;
  • ESG data is now appearing on wealth management platforms for financial advisers;
  • Similar data can be found on investor terminals (e.g. Bloomberg); and
  • We’re now seeing ESG ratings of funds by groups such as Morningstar

 

It’s fair to say the market is awash with ESG data.

 

Is it all too much? I’d argue no, but that it reinforces precisely the reasons why we need more good ESG analysis by groups such as broking firms and ESG research houses to help investors navigate this data to find the issues that matter for investors. This is precisely the reason for ESG Research Australia’s Annual Awards – to recognise and celebrate the best broker research.

 

Why is there such a massive growth in ESG data and research?

In this last year alone we’ve seen numerous examples of why ESG matters, with a number of corporate scandals and incidents that have had very material impacts on companies: the VW emissions scandal, BHP Billiton’s Samarco tailings dam collapse, rate rigging scandals within the banks and the human rights concerns around BroadSpectrum’s management of offshore detention centres to name a few.

 

This flood of ESG data and research is all about helping investors better understand these risks, and pre-empt them.

 

But is there any value in all this ESG research?

The Broadspectrum issue shows how ESG analysis is critical to understanding the full range of factors impacting companies.

 

In 2014, Broadspectrum was offered a take over bid price of $2 per share by Ferrovial. At that time earnings were strong, with a significant contribution via contracts to manage the offshore asylum seeker detention centres.

 

However, during 2015 -16, many responsible investors became concerned, due to the concerns about the treatment of asylum seekers, the massive community opposition to the policy, and the subsequent uncertainty for a company’s earnings that are so reliant on such a controversial policy.

 

In early 2016, the PNG Supreme Court confirmed those concerns finding that these detention centres are unconstitutional and illegal. Broadspectrum, commenting in a market release on the massive risk this finding would impose on their future earnings, rapidly changed their recommendation to shareholders to accept the much lower bid price of $1.50 per share. Those ESG risks of regulation and human rights risks came home to roost (see here).

 

In essence, interrogating and understanding these complex ESG investment issues helped responsible investors be better prepared for this outcome. It is examples like these that highlight exactly why the industry needs high calibre ESG analysts and research.

 

That is why we were pleased to support ESG Research Australia in presenting the 7th Annual ESG research awards on Tuesday for the best Australian ESG brokers.

 

Award recipients were:

  • Best piece of new ESG Research by an Individual Analyst or Team:Risks in Payday Lending and Goods Rental by Sandra McCullagh and Chris Parks of Credit Suisse
  • Best Piece of Ongoing ESG Research by an Individual Analyst or Team:Australian ESG/SRI AGM Series by Sandra McCullagh and Chris Parks of Credit Suisse
  • Best ESG Broking Firm:Citi

 

You can read the full report on the awards here.

 

The Pay Day lending research by Credit Suisse in particular highlights just how great an impact investors can have when informed by such strong research.

 

As reported at the event, this is an issue that impacts upon 60% of Australians. Over the past year, we have seen regulatory tightening of the industry, considerable destruction (between 40-50%) of share price value for three listed companies involved in payday lending, and one of Australia’s largest bank’s (Westpac) pull its support for the industry. Again, these were risks on the radar of responsible investors, but more than that, these were issues that responsible investors contributed towards better outcomes for vulnerable Australians.

 

So, what will be the ESG issues for the coming year?

A panel that I presided over at the Awards event discussed a number of ESG issues and areas that are on the radar for investors in 2016.:

  • Online gambling
  • Sustainable Development Goals
  • Mine rehabilitation
  • Sugar and health
  • Tax havens
  • Corporate culture
  • Climate change impacts across sectors

 

So, we are in a world awash with ESG data and research, the industry is going to require ever more and smarter analysis to consolidate and interpret these important signals that are ever more frequently impacting upon investment valuations and outcomes.

Congratulations to Citi and Credit Suisse for their awards this year.

 

Simon O’Connor

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