Mega fund forecasts paradigm shift in ESG and portfolio value

Speaking at the RIAA Conference in Sydney, Aware Super’s Deanne Stewart said she believes the next six years will bring about significant evolution for ESG, stewardship, and the subsequent impacts on portfolios and investment.

“We have a thesis at Aware Super that over the next six years, we are likely to see far more step change in ESG and driving value in our portfolio than we’ve seen since the creation of the coined term of ESG back in 2004,” the chief executive remarked.

Particularly, the fund has identified a number of trends at play that, when combined, will be “game changers” for the global landscape.

The first of these are “meta trends” like climate change, continued rising global inequality, and the rise of artificial intelligence (AI), each of which, Stewart said, will impact values, business models, and policies around the world.

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“That’s the first force, these meta trends that will really accelerate where value is won and lost in an ESG sense,” she said.

“The second – and you’d probably expect me to say this – is the continued rise of pension funds and sovereign wealth across the globe. The reason I bring that up is actually more their nature and the way they think relative to many short-term traders or institutional investors.

“The very nature of a pension fund or a sovereign wealth fund is very long term, and that has a real bearing on what that means, and the importance of sustainability, the importance of enduring value versus short-term profits.”

Aware Super also noted other key trends, such as an ongoing emphasis on transparency and accountability from a media standpoint, alongside an increased focus on consistency in ESG standards and data.

“If you combine that really quick media cycle, with more transparency and standards, with AI and machine learning – that is going to be a game changer, I think, in the next six years, as to how you get a sense of using all of that data, what is and isn’t going on in companies, what is and isn’t creating value,” Stewart said.

“And that’s where the power of the ESG, the metrics, the data really does, in a much more scientific way, help drive value in investment portfolios than we’ve seen over the last two decades. And for me, there is a real power in that.”

These trends also hold implications for institutional investors like Aware Super from a stewardship perspective, she conceded. This implies a need for increased active engagement with companies both individually and collectively.

Stewart further predicts that given the rapidly evolving 24-hour news cycle, media and reputation management will only become more crucial.

“The transparency is important, not just on a corporate side but on an institutional investor and a super fund side. How are super funds disclosing what they’ve done from a transparency perspective?” she said.

“Board oversight and board positions will become quite a topic of stewardship and importance over this six-year period.”

Importantly, Stewart believes that the strategic use of data and transparency will emerge as a significant competitive advantage for companies, enabling them to effectively determine where value resides.

“So, with that enhanced power data and transparency, ESG is certainly not anything about a moral crusade, but actually truly about the science and the data of what really creates enduring value in organisations,” Stewart said.

For global investors like Australia’s superannuation funds, this entails starting to make portfolio decisions regarding potential winners and laggards in specific sectors, which can then guide investment strategies, Stewart concluded.