ESG’s popularity brings new forms of risk management

Meredith Booth

By

27/04/2018

Australians now expect fund managers to take an ethical approach to their investment portfolios and throughout their organisation, Brightlight Impact Advisory chief strategy officer Sam Richards says.

While the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry shines a light on poor behaviour, expectations are becoming higher for environmental, social and governance (ESG) standards to be met throughout corporate Australia, he says.

Richards says profit for purpose is no longer thought of as the domain of not-for-profit social enterprises based on people’s expectations.

“I think with super funds, the vast majority are owned by Australian citizens who care about outcomes for Australian citizens, so there is an expectation that they behave in a way that’s responsible towards that,” Richards says. “Within that, there’s the tension of ‘How do I do that and remain fiduciary?’ and I think we’re getting better in two ways as asset owners – evaluating what risk is and thinking differently about how this fits into our portfolio.

“That means not compromising risk management but thinking differently about it and I think in the origination market there are providers out there who are thinking differently about [offering] solutions to meet those new paradigms of risk management.”

Brightlight was launched by Christian Super last year. It advises asset owners on impact investments, which can include projects in renewable energy, social enterprise, affordable housing and indigenous empowerment.

Its first client is the $1 billion fund Christian Super, which has allocated 10 per cent of its portfolio to impact investments for the last decade and has used nine different investment structures, with more than 150 underlying portfolio companies.

Richards says ESG was once an unconventional approach to risk management but is now becoming more mainstream.

“Compelling data that the Responsible Investment Association Australasia (RIAA) has published over the years suggests, year on year, these things are becoming more and more mainstream,” Richards says. “It’s not just a question of having a really effective ESG vehicle but also of embedding ESG into your investment philosophy, your thought process, and in your organisational culture.”

Richards, previously chief operating officer at Goldman Sachs Asset Management, says Brightlight’s current focus has been on affordable housing, including crafting a $300 million fund to attract super funds, private equity and banks. The firm is partnering with Nightingale Housing to build innovative socially and environmentally sustainable housing throughout Australia, which would be an investment in an environmental and social return that works to de-risk the financial outlay.

In this project, designed for owner-occupiers, risk is managed because the investment is in stable housing stock within the property cycle and outside the extremes of the apartment market.

“We talk to funds on the investment proposition and 20 per cent to 25 per cent of the housing in any one of Nightingale’s projects is set aside for key service workers,” Richards says. “That is about creating access and plays to the member alignment of many super providers we’re talking to. There’s a wonderful story on a few levels; there’s a portfolio story, there’s a risk management dimension and then there’s a social licence element, which fits the member priorities.”

Richards spoke to Investment Magazine ahead of addressing the topic of social licence and unconventional risk management at the 2018 Fiduciary Investors Symposium, to be held in the Blue Mountains, May 21-23.

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