Does ESG Investing Come at the Expense of Returns?

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Does ESG Investing Come at the Expense of Returns?

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Disclaimer

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Issued by: The Investment Manager, Perennial

Value Management Limited, ABN 22 090 879 904,

AFSL: 247293. Responsible Entity: Perennial

Investment Management Limited ABN 13 108 747

637, AFSL: 275101.

Whilst every effort has been made to ensure that

the information in this presentation is accurate; its

accuracy, reliability or completeness is not

guaranteed. Perennial expressly advises that it

shall not be liable in any way whatsoever for any

loss or damage which may be suffered by any

person relying upon such information or any

opinion, analysis, recommendation or conclusion

contained in this presentation or otherwise arising

in connection with the content of, or any omission

from, this presentation.

The fact that particular securities may have been

mentioned should not be interpreted as a

recommendation to either buy, sell or hold those

securities.

The contents of this presentation were prepared

for information purposes only. Accordingly,

reliance should not be placed on this presentation

as the basis for making an investment, financial or

other decision. This information does not take into

account your investment objectives, particular

needs or financial situation.

Past performance is not a reliable indicator of

future performance. Gross performance does not

include any applicable management fees or

expenses. Net performance is based on

redemption price for the period and assumes that

all distributions are reinvested. Fees indicated

reflect the maximum applicable.

Contractual arrangements, including any

applicable management fee, may be negotiated

with certain large investors. Investments in the

Trusts must be accompanied by an application

form. The current relevant product disclosure

statements, additional information booklets and

application forms can be found on Perennial’s

website www.perennial.net.au.

http://www.perennial.net.au/

Damian CottierPortfolio Manager & Senior Equities AnalystB.Com, LLB, CFA

Emilie O’NeillESG & Equities AnalystB.Com / B.SC (Fin and Psyc), FSA Credential Holder

Our Sustainability Team

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ESG is Capturing Headlines

4Source: Sydney Morning Herald, Australian Financial Review, Money Management

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Sustainability is a Growing Investment Strategy

5Source: Morgan Stanley Sustainability Primer Presentation with data from GSIA 2018

Perennial Value Management Limited – Proprietary and confidential

Sustainability AUM as a % of total managed assets


6Source: Macquarie Research, 23 April 2020, ESG in COVID-19: Win, Lose or Draw?



7Source: Morgan Stanley Research: Sustainable Investing: Quarterly Tracker: April 8 2020


“ESG” Google Searches

- ESG investing considers how a company is performing, improving or how seriously it takes, the environmental,

social and governance aspects of the company’s operations

- Investing in this way allows you to “do good” while “doing well”

What is ESG?

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8

Types of ESG Investing

9

Source: RIAA Benchmark Report Australian, 2019

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UN’s 17 Sustainable Development Goals (SDGs)

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UN’s 17 Sustainable Development Goals (SDGs)

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ESG IntegrationE

SG

&E

Sco

re • The ESG&E score is a

proprietary scoring

system set up and run

in-house by the

Perennial sustainability

team with input and

insight from the sector

analysts. Each

company is given a

score for Environment,

Social and Governance

performance as well as

a score for company

engagement.

En

gag

emen

t •Engagement with

companies to discuss

material ESG issues,

risks and opportunities

Pro

xy

Vo

tin

g • Perennial should vote

on all company

resolutions considered

at general meetings

where it has the voting

authority and

responsibility to do so,

regardless of the

materiality of the

resolution.

Active Management

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Stock Ranking

ASX300 - Passive SFT - Active

Negative Screening

Actively invest in “positive” stocks

Improve outcomes through active

engagement

Invest mainly in innovative small companies

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How Does ESG Impact Investment Returns and Business Models?

Returns & Performance

1. Stock Returns

2. Cost of Capital

3. Volatility

4. Material Business Risks

5. Investor Focus

Sustainable Business Models

1. License to Operate

2. Consumer Demand

3. Staff Outcomes

4. Competitive Advantage

5. Regulation

Research and Studies on ESG Investing

Morgan Stanley Institute for Sustainable Investing (2019)

Responsible Investment Association Australasia (RIAA) Benchmark Report (2019)

The Journal of Portfolio Management (2019)

CPA Australia (2017)

MSCI (2017)

Research from the Harvard Business School (2015)

Lower

downside risk

& volatility

Lower

systematic &

idiosyncratic

risk

Less ESG

Controversies

Lower cost of

capital & higher

valuations

Higher returns

& profits

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How Does ESG Impact Investment Returns and Business Models?

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Quintile 1 ESG rated companies have:

• higher P/E

• higher P/BV

• higher gross profitability

Source: Macquarie Research, Quantamentals: ESG finding the Glove that Fits, 23 April 2020


Sustainability Performance During COVID-19

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Past performance is not a reliable indicator of future performance

Source: Credit Suisse Research, MSCI, Thomson Reuters Datastream

Data to 14th April 2020

-25%

-20%

-15%

-10%

-5%

0%

All country world Europe China USA

ESG Leaders Index Broad Market Index

YTD Performance (Absolute)

Australian Sustainability Performance

18Past performance is not a reliable indicator of future performance

Source: Morningstar, as at 30/04/2020

Why Does it Work?

Water management and supply

Industries at risk of disruptionIndustries set to benefit

Renewable energy

Low carbon technologies

Education

Oil and gas

Casinos and gambling

Alcoholic beverages

Tobacco

Processed foods

H I G H E R G R O W T H & L E S S V O L A T I L E

Forestry and logging

Healthcare Coal Operations

L O W E R G R O W T H & M O R E V O L A T I L E

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Why Does it Work?

AMP & The Royal Commission Whitehaven Coal & drought conditions

Newcrest BHP & Samarco mine

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Climate Risks and Opportunities?

IAG (ASX:IAG) & AUB Group (ASX:AUB)

6.00

6.50

7.00

7.50

8.00

8.50

9.00

09/19 10/19 11/19 12/19 01/20 02/20 03/20

IAG

10.00

11.00

12.00

13.00

14.00

09/19 10/19 11/19 12/19 01/20 02/20 03/20

AUB

Why Does it Work?

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Stock COVID-19 Update

Genetic Signatures (ASX: GSS) Modified testing kits to detect COVID-19

Janison Education (ASX: JAN) Online assessment & learning solutions

Mesoblast (ASX: MSB)Approval for products to treat COVID-related

ARDS; 75% success

Starpharma (ASX: SPL)Product ingredient has anti-viral activity

against COVID-19

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Small Caps and ESG

1. Innovative solutions and technologies

2. Providing capital to support growth

3. Greater opportunity for engagement

4. Support for smaller listed company sustainability teams

5. Avoiding large cap stocks with sustainability issues

ESG Stocks on the ASX

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Reducing GHG Emissions

Dairy company

targeting efficient

farming practices that

significantly reduce

GHG emissions

NZ energy company

producing 100%

renewable hydro

electricity with large

market share

Early-stage – carbon

dioxide capture

technology to

reduce CO2 in

cement and lime –

partnering with

European cement

industry

Mature NZ energy

company producing

100% renewable hydro

and geothermal

electricity with large

market share

A growing

Australian

renewable energy

company that is

focussed on the

corporate and

industrial

customers

Portfolio of solar

energy plants

across Australia

and the US

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Renewable Energy on ASX


Based on the renewable assets of our portfolio holdings as at December 2019; Statistic according to the Climate Council

Solar

~1,000 MW Capacity

1 MW powers ~300 homes

Solar

Hydro

Energy storage

Wind

~4,500 MW Capacity

Wind

Hydro

Geothermal

~500 MW Capacity

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Waste

management

company focused

on improving

sustainability in

operations such as

its energy-from-

waste projects and

organic treatment

facility

ESG Stocks on the ASX

Outdoor apparel and

equipment retailer with

focus on sustainability.

Largest Australian &

New Zealand company

to be a certified “B

Corp”

Plus sized clothing

retailer focused on

body positivity and

‘living wage’ in its

supply chain

Community

focused bank

providing

banking services

for regional

customers

Creates affordable

communities. Has

made improvements

on their supply chain

and installed solar

panels in their

communities

Private health

insurance

company working

to improve its ESG

outcomes

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Source: Perennial Value Management. Perennial Smaller Companies Sustainable Future Trust inception date is 1 February 2018. Past performance is not reliable indicator of

future performance. Net of fees performance shown.


Performance: Sustainable Future Trust

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Period to 30 April

2020

1 Mth

(%)

3 Mth

(%)

1 Year

(%)

2 Year

(% p.a.)

Since Inception

(% p.a.)

Perennial

Smaller Companies

Sustainable Future

Trust

16.4 -17.3 -3.1 3.4 3.7

S&P/ASX Small

Ordinaries

Accumulation Index14.3 -19.0 -13.3 -3.6 -3.0

Value

Added/Detracted +2.2 +1.7 +10.3 +7.0 +6.7

Sustainable Future Trust Outperformance

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Performance as at 30th April 2020

Source: Perennial Value Management. Perennial Smaller Companies Sustainable Future Trust inception date is 1 February 2018. Past performance is not reliable indicator of

future performance. Net of fees performance shown.


83% 83% 83%

63%57%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% total months outperformed % months outperformed when

benchmark up

% months outperformed when

benchmark down

Outperformance in Up and Down Markets

Last 12 months Since Inception

• No trade-off between ESG investing and returns

• Increasing evidence that you can generate better returns from ESG investing….

• With lower volatility

• While making a positive contribution

Perennial Smaller Companies Sustainable Future Trust

Conclusion: You Should Consider Investing Sustainably

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Does ESG Investing Come at the Expense of Returns?

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