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PRI reporting framework 2020

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Select which of these effects followed your ESG integration.

12.2. Additional information.[Optional]

We recognise that ESG factors can have a significant influence on the value placed on a company and its ability to drive shareholder returns on a long term basis.

ESG is relevant to a portfolio or investment decision if one or more of the following apply:

  • ESG is a predictor of future returns.
  • ESG analysis indicates longer term risks that investment analysis may not factor in.
  • ESG analysis indicates that there are moral or ethical issues which should be considered.

It is also important to consider ESG issues in light of the chosen method of implementation and investment time horizon. For example, ESG issues will have much more importance for directly or indirectly held securities where the holding period may be three years or more, than for a short term momentum based trade using futures.

Companies that undertake activities that are socially undesirable or environmentally damaging expose themselves to the longer term risk of regulatory change that adversely impacts their business. There is also the risk of fines or paying restitution if the conduct is illegal or negligent. This risk is particularly relevant in some sectors, such as energy.

We are unlikely to take a formal, permanent “divestment” approach, but rather consider whether the longer term ESG risks are sufficiently captured in the market price, and sufficiently diversified away within an index, or not. Unless the issue is such that it would result in the investment being worthless, then longer term risks are a matter of valuation, and whether the risks are adequately compensated for in the expected investment return. The expected holding period of the investment is also a very relevant consideration in this regard, as these types of risks are more important for assets with longer holding periods.


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Poor conduct controls: Evidence of a company breaching its obligations under Australian regulations, with internal failures to adequately bring the issue to Exec/Board attention, reflecting a poor conduct culture.

ESG incorporation strategy applied Screening|Integration

Impact on investment decision or performance

Reduced holdings in conventional funds; divested in Sustainable and Ethical funds.

ESG factor and explanation

Physical climate risk - prolonged drought: An agricultural company with high exposure to areas impacted by prolonged drought, with limited options for geographic diversification. 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Reduced holdings

ESG factor and explanation

Transition risk - Identified an energy company facing a capital impost as they shift their generation mix away from coal and long term pricing pressure as renewables continue to enter the grid.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Did not invest

ESG factor and explanation

Human capital management and innovation - Identified a company with leading human capital management controls and clear integration of culture into strategy, reflected in strong performance on employee engagement, high staff retention, product development and innovation.Also, training and development programs and initiatives to build innovation capability.

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Increased position

ESG factor and explanation

Sustainability performance: Identified a property company with leading energy and water use across its portfolio, with a clear plan to increase solar capacity. Further, the company had comprehensive disclosures of asset-level physical resiliency testing.

 

ESG incorporation strategy applied Screening|Integration

Impact on investment decision or performance

Increased position in our Sustainable Series funds as part of our positive screen towards leading ESG performers.

13.2. Additional information.[Optional]


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