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Forward looking measures to drive ESG says Perennial

The suggestion that investing in a more responsible or sustainable manner detracts, rather than adds to returns has now been debunked, with research proving the gap no longer exists.

This message is central to Damian Cottier, Portfolio Manager of the Perennial Better Future Trust, and his mission to deliver strong returns whilst contributing to a more sustainable and profitable corporate sector.

Having spent significant time as a corporate lawyer, guiding clients on governance and other issues related with complex mergers and acquisitions, you could say Cottier is uniquely suited to sitting across the table from the boards and management team of some of Australia’s fastest growing companies.

The Perennial Better Future Trust, which is managed with the support and Emilie O’Neill, recently garnered its own business unit with the growing Perennial group. The move comes as the surge in interest in ESG strategies creates the need for communication and clarity.

In a recent interview Cottier reflected on close to two decades in the industry, highlighting numerous trends and opportunities that continue to emerge as decarbonisation becomes mainstream.

Explaining the Better Future Trust, he highlights that it is an ‘authentic approach to ESG’ that ultimately ‘seeks to invest in ASX companies that are helping to shape a better future’. Whilst it sounds straight forward, it isn’t always easy.

The fund is separated into two distinct ‘pools’, the first being Better Future Investments, primarily those involved in education, healthcare, renewable energy and technology which are seeking to solve major challenges head on.

The second bucket is companies that have strong ESGE Scores, based on Perennial’s in-house models, and which ‘are not doing harm but are not as focused on positive outcomes’ as the rest of the portfolio. The strategy carries a smaller company bias, primarily because ‘we are finding more innovators providing products or solutions to shape a better future’ in this part of the market, he says.

Reflecting on his extensive experience engaging and dealing with boards, Cottier highlights that, “although there has been engagement on board structure and remuneration for quite some time, engagement with companies on environmental, social and sustainability issues was fairly limited up until around 5 years ago, and has evolved further even in the last couple of years.”

One of the key triggers behind the growing interest of boards, ultimately is their profitability and growth opportunity. Cottier notes that as “companies have increasingly realised that well developed sustainability and ESG strategies attract the incremental investor and are likely to ultimately result in a lower cost of capital.”

In a world where interest rates may well be rising, having access to capital at the lowest possible cost will be as important as ever. That said, getting to know management and building ongoing relationships is central to the approach used by the Better Future team, noting that they “want to understand management’s depth of knowledge and beliefs in ESG and sustainability” and that it must be an ‘authentic’ part of the company’s strategy. 

The likes of Rio Tinto have attracted a blowtorch onto management teams, as well as the groups that invest into these companies. Cottier says ‘we have a sell discipline which is triggered by valuation, material change in investment thesis and also ESG concerns’ of which a ‘deteriorating ESG score’ is a central consideration.

In the case of ESG missteps he says, “we will typically engage with the company with a view to ascertaining how deeply ingrained the issue is and the likely ongoing impact on valuation.”

Whilst carbon intensity and emissions have become the norm for portfolio reporting, and are embraced by Better Future, it is by its nature ‘backward looking’ with “forward looking measures will become an increasing focus as companies start to provide more detail on the steps and initiatives, they are taking to reduce emissions.”

An example of a typical holding within the portfolio is Calix (ASX:CXL) which is an industrial solutions business that is developing technology to assist in decarbonising the economy. The group has partnered with the likes of AdBri and Pilbara Minerals in Australia as they ramp up their rollout.

“One of the uses of their technology is the company’s LEILAC process that assists companies to mitigate greenhouse gases from the lime and cement production process, which is responsible for ~9% of global greenhouse gas emissions. It is also adapting its technology to improve the sustainability of the processing of lithium ore and is developing a technology to produce zero emission iron and steel from iron ore. “ he says.

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