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After being awarded Fund Manager of the Year for 2020, you could be forgiven for expecting Pendal to rest on its laurels and cruise into the Christmas break. Yet following a year of turmoil and change the group has flagged a number of enhancements to its growing stable of funds, particularly around ESG and ethical investing.

The concept of ‘greenwashing’ has been a popular term in 2020, as every manager under the sun flagged its ‘ESG’ credentials to investors. Yet issues like those experienced by Crown Ltd (ASX: CWN) and Rio Tinto Ltd (ASX: RIO) showed that most aren’t willing to put their clients’ money where their marketing documents are. ASX-listed Pendal appears to be one of the few, and recently doubled-down by announcing a number of ‘enhancements’ to its Ethical Share Fund.

Head of Equities, Crispin Murray, led the charge in November, announcing a suite of changes that the firm hopes will better align the fund’s strategy with that of its investors. In practice, applying ESG screens to listed companies is one of the most difficult roles a manager can take on, with every individual investor having a different view on each company’s business model.

According to Murray, investors need: strategies that can protect against unpredictable outcomes; investments that benefit from and are leveraged to structural changes; those that can enable positive change while avoiding harm; and a high conviction, all-weather, nimble portfolio. In Pendal’s view, this requires a move towards more innovative, digital knowledge- and education- based industries in the years to come.

The new strategy is focused on three pillars: Block, Build and Commit. The first stage of ‘Blocking’ companies involved broadening Pendal’s negative screens of exclusions, including to predatory lending practices, gambling and fossil fuels among others, and to institute a new process for assessing ‘incidents’ that occur with portfolio companies.

Yet the negative screening of companies in the Australian market can be difficult, such is the limited depth on offer. In this case, the managers will also prioritise ‘active stewardship’ and engagement to promote more sustainable activities and minimum ESG risks. While many managers highlight ‘engagement’ in their ESG strategy, few have the pull of Pendal’s $100 billion in assets and the many doors that opens. 

Driving the changes has been Pendal’s 2019 acquisition of ESG activist and adviser Regnan. The group was born out of the Commonwealth Super Corporation before growing to advise some 41 of the ASX’s largest 200 companies in the 2020 financial year on issues ranging from climate and social matters to improving their reporting and disclosures. Regnan’s experience will be used “to assess companies on their contribution to a more sustainable, future-oriented Australian economy, as well as their management of ESG risks.”

The second stage is to actively invest into companies that enable a more sustainable future and which ‘future proof’ the Australian economy as we transition away from commodity exports. This, they expect, ‘allows the fund to benefit from trends shaping coming decades, including digitisation and decarbonisation’.

Some targeted areas of opportunity align with the UN Sustainable Development Goals, ranging from ‘social inclusion and diversity’, the ‘provision of decent work’, and access to ‘quality education’. It also extends into supply chain resilience and more sustainable resource consumption which have become clear priorities of the Australian Government post the pandemic.

The result, is a concentrated, high-conviction strategy of 15 to 35 ASX-listed stocks in Pendal’s portfolio. At present, names like CSL Ltd (ASX: CSL), Xero Ltd (ASX: XRO), and Goodman Group (ASX: GMG) are key portfolio holdings.