Untangling the complex world of ESG investing
From the hundreds of different ESG frameworks that have sprung up in the last decade, Alphinity Investment Management chose one on which to hang its sustainable investment process: the United Nations Sustainable Development Goals.
As a globally recognised charter adopted by all United Nations signatory countries, Alphinity selected them because they are so comprehensive, says Alphinity’s ESG and sustainability manager, Jessica Cairns.
“We define our universe of stocks using the UNSDGs to help us identify companies that are doing good,” she says.
Cairns and her team regard this as the best method available, given the level of international uptake and the broad range of activities, which aren’t limited to environmental or any other individual areas. The UNSDGs include:
- elimination of poverty
- climate action
- sustainable cities and industries.
“It’s not just on the environmental or the social side they have some very clear objectives, some 169 of them, which we think is very important,” Cairns says.
Alphinity also uses the Responsible Investment Association of Australia’s scale and definitions for responsible investment. This scale provides definitions for a range of approaches to responsible investing including ESG integration, exclusions and sustainable investing.
Nothing is perfect
That’s not to say any one framework is perfect. One of the limitations of the UNSDGs is that it’s aimed specifically at policymakers and governments rather than individual investors. And not all of these UN goals are relevant to businesses.
Another challenge is that very few, if any, companies achieve only positive scores. Cairns and her team address this by also taking a view on both the negative and positive scores and netting the outcome.
Alphinity also applies a couple of blanket exclusions across the types of companies that will never make it into one of their funds. All fossil fuel producers are excluded, as are companies involved in gambling, tobacco or the manufacture of weapons.
In its Australian equity funds, applying these exclusions allows them to whittle down the ASX300 to around 180 companies. These are then weighed and scored using the UNSDGs.
Once the universe is established the investment team apply the Alphinity Investment process to construct a balanced portfolio.
Alphinity’s Sustainable funds invest in listed companies that support social priorities that offer attractive prospective returns. These companies ‘do good’ and ‘do it well’. For more information, visit their fund profile below.
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