The Australian ESG landscape

By Manny Anton | More Articles by Manny Anton


Måns Carlsson, OAM, Head of ESG at Ausbil Investment Management, provides an update on the Australian ESG landscape.

Manny Anton: I'm Manny Anton from the Finance News Network, and with us today is Måns Carlsson, OAM, who leads Ausbil's ESG team, taking an active approach to engaging Australia's listed companies on environment, social and governance issues. Måns, welcome back to the network.

Måns Carlsson: Thank you.

Manny Anton: Perhaps we can start with hearing your views on how Australian companies have progressed on the ESG front over the last 12 months.

Måns Carlsson: Yeah, starting point I guess is I've been in ESG for 17 years and I must say that the pace and the number of ESG drivers are just increasing all the time. So you have things like climate change, human rights, modern slavery, technology changes, etcetera, etcetera, all of which represent risks and opportunities for us. And at Ausbil we've chosen to do internal ESG research. So rather than buying ESG research from third-party data providers, we think it's better to do proprietary ESG research because that's ultimately how we can capitalize on those risks and opportunities, because ESG to us means better informed investment decisions. That's why we integrate ESG.

If I look at the last 12 months, there's been a lot of changes, and both good and bad, I suppose. If I look at the last reporting season, we rate about 240 companies at the moment on ESG, and there were both downgrades and upgrades out of those. And in terms of trends, I think one trend particular, that stands out to me, is just a difficulty for companies to balance, particularly consumer-facing companies, to balance growth with a social license. And in the conversations we've had with companies, I think they're very acutely aware of that challenge, particularly in an economy characterized by rising costs of living. And they're also acutely aware of what can go wrong if they don't do a good job. So that's one trend.

Another one I think is the workplace reforms in Australia, and the jury is still out on that, in terms of how it will play out, but it increases the complexity for companies. Another one is safety performance. Last year we saw a very high number of workplace-related fatalities, even companies that usually don't have fatalities. This reporting season, I think it's stabilized a bit, but there're some companies that still face safety issues. Another trend of course, is just the practical challenges with implementation of the decarbonisation strategies for many companies.

Manny Anton: Måns, okay, the next question, why has the rollout of decarbonisation initiatives been slower than expected, do you think, in Australia?

Måns Carlsson: The decarbonisation is probably going slower than what many expected, including politicians, but I think there's a lot of reasons for that. One is of course, just in some cases at least, lack of government support around decarbonisation. But the big challenge I think is the technology pace and the economic viability of many of these decarbonisation options, because I think there was a lot of hype, and opportunities about decarbonisation, and expectations that would happen very soon, but I think the reality is quite different and I think many companies have been very transparent about that in the decarbonisation too, which is good. So there are some short-term bottlenecks, particularly when it comes to economic viability of a certain decarbonisation technology. So I think that's the main driver, but it doesn't change the long-term view. So we have positioned ourselves for decarbonisation as a big long-term investment theme, and we can do that through investing in companies we think will either drive the decarbonisation or companies that we think will benefit from decarbonisation. One example is green metals, commodities that will thrive in a decarbonised world.

Manny Anton: Okay, and it'd be remiss of us not to touch on AI because it seems to be AI is everything these days. But can I ask you, does AI have any implications for ESG and can it assist in achieving some of those ESG goals?

Måns Carlsson: Yep. I think AI or artificial intelligence is very much a double-edged sword when it comes to ESG. So it's very easy to get excited about efficiency gains, productivity gains, for instance, in customer service for companies, but also quality outcomes in medical diagnostics, for instance. So that's a benefit of AI. On the other hand, there's also risk that AI will be misused. One example is, customer scams and losses from that for banks, for instance. And there's some other more specific risks as well, particularly when it comes to their regulation and legislation of AI, because that's still catching up with the real economy. So if you look at an insurance company, for instance, if they use AI for their pricing modeling of consumers, if the inputs are wrong, they might inadvertently have a pricing mechanism leads to discrimination of certain demographic groups. So we discuss this a lot with the companies to make sure they're aware of their risks as well.

I think investors in general tend to be focused on their positives, and I think there's some great opportunities, but let's not forget about the risks. And Ausbil has signed up to something called ethical AI, and we also chair the human rights working group of RIAA, which is the Responsible Investment Association Australasia, and ethical AI is a big discussion topic there. So there's a collaborative group of investors coming together to discuss risks and opportunities on ESG and particularly pertaining to human rights. And we will publish something later this year, which will probably help investors to get their heads around both risks and opportunities, from a human rights perspective in relation to AI.

Manny Anton: Okay, and just to close it up, how are Australian corporates, in terms of their ESG performance, how are they comparing to some of the international corporates in terms of their ESG performance? Where do we sit in the pack?

Måns Carlsson: Yep. I think there's a bit of a mixed bag, but when you compare Australian companies versus international companies, I think there're three aspects are really relevant for us. One is that the drivers on ESG are very similar regardless of where you go in the world, whether that's the US or the EU or Australia, the themes are the same. And many companies are global here, so they're caught up in a very complex world. So for instance, if you look at climate change, in the EU, there's a carbon emissions trading scheme. In Australia, we have the safeguard mechanism, which is quite different where you generate credits. So you have to buy credits depending on how you cut your emissions on something like human rights and modern slavery. In the US, there's a ban on goods made by forced labor. In the EU, that calls for mandatory human rights due diligence, whilst in Australia we have a Modern Slavery Act, which is more of a transparency act.
So without getting into all the nitty-gritty details, it just means that companies are operating a very complex environment, whether that's in their global operations and/or global supply chains, which again, is why we think having proprietary ESG research can help us to find those risks and opportunities globally, because I think you can't look at Australia and isolation. The other aspect is, it comes back to our engagements. So we do a lot of ESG-related engagements with companies, and there I think, it makes a lot of sense to look at international practice. So regardless of what the ESG issue is, we always use the same model for ESG engagements, which is first, what is the financial materiality of that ESG issue? Second, what is global best practice, in terms of managing that issue? And then third, we just encourage companies here to adopt that.

A real-life example would be all the factory visits we've done in Southeast Asia. So I've been to China, Cambodia, Bangladesh, I was in Bangladesh last year. When you go to a country like Bangladesh, you get to see the workers, the unions, the NGOs, but you also get to see leading companies. And by speaking to those companies, first of all, you can appreciate the complexities companies are facing, but you can also learn what international leaders are doing. You can take that with you back to Australia and encourage companies to adopt what is best practice here, which I think is a good way of dealing with ESG. But the third aspect is also that I do think, coming back to your question, I do think there's some leaders on ESG in Australia too. For instance, we have property companies that realize that focusing on sustainability features in the properties can be the difference between having a tenant and no tenant. We have a number of mining companies producing very valuable commodities that will be used in a decarbonising world and some companies are driving the decarbonisation too. So it's a bit of a mixed bag really. I don't think Australia's any worse or better, but there're pockets of companies where we think they're leaders and quite a few of those are in our portfolios as well.

Manny Anton: Måns, it's been a pleasure and thank you for your time today.

Måns Carlsson: Thank you.