Considering ESG risks can help future-proof your investments

Many investors, from high-end institutions to mum and dad, are keen to understand the environmental, social and governance risks attached to a portfolio in order to make more informed decisions about where they invest.

Westpac has partnered with Morningstar Sustainalytics to give retail investors tools to gain better clarity on how much a company’s economic value is at risk from ESG factors, by incorporating Sustainalytics’ ESG Risk Ratings into its share trading platform.

“I believe that you must consider ESG factors as part of your overall decision making,” Chris Terzis, Sustainalytics’ senior director, client relations for the Asia Pacific region, says in a Wire interview. “If you’re not focusing on that, then you’re not picking up on changes or risks that the majority of investors are, and that could potentially impact on your ability to generate returns.”

For Rohan Gorringe, head of online share trading at Westpac, the partnership is all about giving investors ease of access to ESG research tools.

“This will provide Westpac share trading customers who are interested in this area with additional tools to consider their own socially responsible strategy,” Gorringe says, while adding that it was down to each individual customer to make their own investment decisions.

“In the Australian market, just like the global market, investor appetite for sustainable investments is on the rise, and we expect that trend to continue.”

Sustainalytics’ methodology is based on two dimensions. The first part is to identify the ESG risk exposure that a company has, then an assessment is made on how well the company’s management team is managing that risk.

A team of analysts assesses companies based on a range of factors, using all publicly available information, with a risk rating then assigned on a scale ranging from negligible to severe.

“The higher the risk, the higher the probability that there will be a material ESG event that occurs in the future that will have a financially material impact on the company,” Terzis says.

Sustainalytics’ says that what sets its model apart from most of its competitors is that its ratings scale is universal, rather than differentiated by sector, making it easier for investors to make comparisons across a broad range of companies.

Australians are increasingly aware of ESG issues and are positioning their investments accordingly. A recent survey by the Responsible Investment Association of Australasia found that four out of five expect their bank account and super to be invested responsibly and ethically, with that figure rising to almost nine in ten among younger respondents.

That’s putting pressure on companies to improve their ESG policies and disclosure, but along with that comes a growing risk of greenwashing – where corporates embellish their sustainability credentials to seem stronger than they are. 

Regulators are looking to crackdown on the practice, with both the ACCC and ASIC saying that enforcements in relation to greenwashing claims will be a priority in 2023.

“Anything to do with greenwashing will get captured and assessed as part of our approach,” says Sustainalytics’ Terzis. “We don’t call out greenwashing, what we assess is a company’s ability to demonstrate that they are managing their ESG risks.”

READ MORE: The unstoppable rise of sustainable investment 

Westpac is continuing to work with Sustainalytics to expand the breadth of its Australian coverage, Gorringe says. ESG Risk Ratings are currently provided mainly for companies in the ASX 200 share index, including Westpac.

Australian corporates are increasingly adopting international ESG reporting standards to bolster their own policies and practices, Terzis says, adding there was still work to be done.

“It does require a shift in focus or mentality. Historically, businesses have just focused on profit, now there’s this element of making sure they’re continuing to generate a profit, but doing it in a way where they’re not compromising or having a negative impact on the environment and society.”

The proliferation of ESG ratings tools in recent years has seen them also become subject to greater scrutiny, with the European Commission proposing regulation, and the Securities and Exchange Commission in the US also paying them closer attention.

“We understand the recent regulatory focus on ESG ratings given the role they play in portfolio construction, risk management and benchmarks,” Terzis says.

"Provided that these new rules are principle-based, focused on transparency and integrity, and globally coherent, they should help investors compare and use ESG ratings with confidence, while allowing for innovation and greater coverage.”

Visit the Westpac Share Trading website for more information.