Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 296

What do top ESG companies look like?

ESG integration is a branch of investment analysis that assesses companies on their environmental (E) and social (S) impacts as well as the quality of their governance (G). It is a tool used by investment managers to gauge the long-term financial health of companies. For example, a company that pollutes the environment could face financial penalties as well as damage to its reputation, both of which could affect the company’s profitability. In this sense, ESG integration is ethically passive - it is concerned about the financial impact of things like pollution, poor labour practices and a lack of diversity on boards – not whether they are right or wrong.

Ethics is different

An ethical investment manager, on the other hand, will actively screen out companies that engage in poor practices and look to invest in companies that do good for people and the planet. ESG integration is often used by fund managers who want to take a best-in-sector approach. That said, it can still be a useful tool for ethical managers who want to analyse the non-financial practices of companies in more detail. However, basing an investment strategy on ESG alone will never be a replacement for a truly ethical investment approach.

To fully appreciate the difference between ESG and ethical investment, it’s worth taking a look at the types of companies that feature on ESG lists or indices. One of the better-known indices is The Dow Jones Sustainability Australia Index, which is reviewed annually by investment manager RobecoSAM using the latter’s Corporate Sustainability Assessment.

In its annual update in September 2018, S&P Dow Jones described the index as the “gold standard for corporate sustainability” based on “financially material ESG factors”. The Dow Jones Sustainability Australia Index is made up of 43 companies with some surprising inclusions among them. This list is eye-opening because it tends to favour companies with comprehensive sustainability reports rather than the most socially-responsible business practices.

Let’s take a look at some of the companies that made the list.

Gambling companies

Two notable inclusions in the index are gambling and entertainment companies Star Entertainment Group and Tabcorp Holdings. Star Entertainment Group is the owner of casinos in Brisbane, the Gold Coast and Sydney, while Tabcorp offers wagering and gaming services and also has a media arm that broadcasts horse racing on Sky. On the face of it, it is hard to understand how companies that earn the majority of their revenue from gambling could be considered sustainable. On its website Star Entertainment Group touts itself as the “global leader of the casino and gaming industry” as per the Dow Jones Sustainability Index. Star Entertainment Group notes it achieved maximum scores from Dow Jones in the areas of anti-crime policy/measures and promoting responsible gambling.

In its 2018 Sustainability Report, Tabcorp describes itself as a “significant economic contributor to Australia” with a focus on “responsible gambling and advertising practices”. However, despite its impressive ESG credentials Tabcorp was fined $45 million for breaching money laundering and terrorism financing laws in 2017, which at the time was the largest civil penalty in Australian corporate history.

Mining explosives

Also on the Dow Jones Sustainability Australia Index is Melbourne-headquartered multinational Orica, which supplies commercial explosives for the mining, quarrying, and oil and gas sectors. Orica publishes a comprehensive sustainability report each year that covers issues like workplace safety, climate change and good governance. However, in 2014 Orica was forced to pay $768,250 for releasing pollutants at its Kooragang and Botany plants (the largest penalty every issued by the Land and Environment Court), and in 2012 the Queensland Court ordered Orica to pay $432,000 after the company pleaded guilty to releasing cyanide into the environment on 217 occasions. In addition, The Newcastle Herald reported in 2011 that hexavalent chromium had “rained down’” on about 25 workers on duty at the Kooragang Island plant in August that year.

Other ESG companies in the Dow Jones Sustainability Australia Index include mining and fossil fuel companies Oil Search, Woodside Petroleum, Wesfarmers and Newcrest Mining. It’s encouraging to see these companies are paying attention to their environmental impact and looking to give back to the communities they impact with their activities. Oil Search, for example, has donated $5 million to support disaster relief efforts in Papua New Guinea as well as developing roads, hospitals and schools.

However, some mining practices are unsustainable in the long term, contrary to the high ESG rankings of the companies named in this article. That said, some ethical investors may decide to invest in mining companies after intense scrutiny.

Australian Ethical does not invest in any of the companies discussed. However, we acknowledge, for example, that metallurgical coal is necessary in the short term to make steel to build the renewable infrastructure of the future. Higher recycling rates for scrap steel (a process which does not require metallurgical coal) will help reduce the demand for this type of coal.

ESG can be a useful tool but it should never be mistaken for a genuinely ethical approach to investment. Ethical investors are focused on delivering returns without harming (and indeed proactively benefiting) the planet, people and animals. Australian Ethical assesses each company on its merits based on the principles laid out in our Ethical Charter, which has been unchanged since 1986.

 

Leah Willis is Head of Client Relationships at Australian Ethical, a sponsor of Cuffelinks.

 

RELATED ARTICLES

Is it a myth that 'purpose' can drive corporate profits?

Investment learnings from the COVID-19 crisis

ESG by new means, to new ends

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.