Should ESG investors exclude polluting sectors?

By Cameron Micallef

February 27 2020
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Industry experts have warned investors looking to have an impact environmentally that excluding high-polluting companies may not have the desired impact.

In a sustainable investing briefing, Jenn-Hui Tan, Fidelity’s global head of stewardship and sustainable investing, and Alex Duffy, Fidelity’s portfolio manager, explained why investors shouldn’t exclude companies from their investment universe.

“A hard exclusion approach is a bit of a blunt instrument.

“Actually you’re probably better off ensuring capital is being driven towards companies with a sector who exhibit best in class practice and then try to improve those practices, then you are just excluding and leaving the industry to the vagaries of a private equity group, who are less scrupulous and more short-term in nature,” Mr Duffy explained.

The fund managers highlighted that in a capital-driven market, projects that will make money will receive funding.

“I think that is one of the issues we have with exclusions.

“Fundamentally, if you think the right thing to do is to exclude a company from the investment universe, then your underlying views of a company’s cost of capital is driven by that exclusion,” Mr Tan said.

Mr Tan highlighted who has control of a company, stating: “For as long as coal delivers an economic return, there will be a buyer for that asset price.”

Mr Duffy said large funds are able to push their clients’ wishes by being at the meetings and guiding the businesses.

“My preeminent focus is on how sustainable is this business model? And what does that mean for the sustainability of the cash profits it is able to generate and therefore the sustainability of the dividend stream that the shareholder can expect to receive from this business,” Mr Duffy said.

Mr Duffy said the longer-term investors look into the future the more ESG and fundamental investing merge.

“My goal, when I walk into these meetings and have these discussions, is to make money, and to understand what it means for the intrinsic value of these businesses and the return expectation, I can expect an agenda. We shouldn’t make any mistakes here. We’re in the business of paying 20 years of cash flow for the majority of companies that we invest in. And so you need to be sure that those cash flow streams are going to be sustainable in every sense of the word in order for you to get to realise that value,” Mr Duffy concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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