At GESB, investing your super means finding ways to deliver better financial outcomes for you. This includes considering the potential impacts that our investments could have on the environment and community, as we recognise that these factors can impact long-term returns.

As part of this process, we use professional investment managers like Pendal Institutional Limited (Pendal) to analyse, buy and sell investments on our behalf. Pendal is a large investment manager which specialises in Australian Shares.

Being a large company means Pendal allocates specialist resources to support responsible investment, so Pendal can manage environmental, social and governance (ESG) issues within the portfolio.

We spoke to Jim Taylor, Portfolio Manager, Australian Equities at Pendal to learn more about the company’s approach to responsible investing.

How can responsible investment help create value for GESB members?

Jim explained that one of Pendal’s duties as a fiduciary, being an organisation that acts on behalf of others, is to protect and enhance value for beneficiaries.

“We believe that practicing responsible investment is key to meeting our fiduciary duty,” he said. “At the end of the day, we are supporting GESB members to save for their retirement. We should also be thinking about the world into which they’ll be retiring.

Integrating ESG and undertaking meaningful stewardship of the investments made on GESB’s behalf supports long-term thinking and better ESG performance at companies, and ultimately better financial outcomes for members.”

What is Pendal’s approach to responsible investing and how has it evolved?

“Responsible investing has been a part of Pendal’s investment approach since the mid-1980s¹,” said Jim. “ESG considerations have become more important in recent years – and for good reason. ESG risks are far more material and significant in terms of the consequence for our portfolios than they used to be.”

As Jim explained, Pendal drives better outcomes for beneficiaries in two main ways:

• Integrating ESG – which means considering ESG factors, risks and opportunities and how these may affect a company’s financial performance, and adjusting investment decisions accordingly
• Stewardship – which involves meeting with investee companies to share how companies could be better addressing ESG matters, then using Pendal’s voting rights to reinforce these messages and represent shareholders

“We know that for GESB members, we’re managing their savings for retirement, which may not be withdrawn for decades. We want to see company management build strategies to enable success not for next quarter’s results, but for the years ahead. And when you start to think about the longer term, it’s important to consider ESG, because these matters become more material to a company over time.”

How does Pendal engage with the companies they invest in?

“We regularly meet with company boards and management, even when we may not hold shares but are considering investing,” said Jim.

In 2020, Pendal was involved in 339 direct discussions of environmental, social and/or governance issues with 107 Australian companies.

Pendal meets with companies to:

• Fully understand their risks, especially when companies sometimes don’t include enough ESG information relevant to investors in their annual reports
• Drive improved practices on ESG matters, capital allocation, company strategy, or anything Pendal has found to be most relevant to protecting or enhancing value for shareholders
• Push the company beyond short-term planning to make decisions that will benefit them – and ultimately shareholders – over the long term

“Engagement is not a single conversation,” Jim said. “It takes time and effort to build constructive relationships and gain the trust of the company. When a company isn’t receptive to change, there are other ways to communicate investor preferences. The most common is to vote in a manner which supports messaging.”

What does Pendal consider when voting at annual general meetings (AGM) on behalf of GESB?

Pendal, on behalf of GESB, is entitled to vote on a number of resolutions put to company AGMs on a range of matters, from corporate governance through to director elections and approvals of executive pay plans.

Jim noted a recent trend where groups of shareholders work together to put forward a resolution at AGMs which focus on ESG issues, such as climate change and human rights.

“For us, we start by considering each single resolution on its merits,” he said. “The key question we ask is whether the resolution, and its associated outcomes, is in the best long term-interests of shareholders. We ask questions such as: are these the best directors for the job, is this the best use of capital, and is this going to support the long-term viability of this business?”

What does Pendal consider to be an ESG issue which is emerging as more financially material?

Jim noted community relations and the concept of social licence to operate as a clearly emerging material issue, in Pendal’s view. This was demonstrated by last year’s destruction of the Juukan Gorge caves, a culturally significant Aboriginal heritage site, by mining company Rio Tinto and the subsequent response from shareholders and the public.

“This was a formative moment in corporate Australia,” Jim said. “Failing to understand community expectations, and in this case relations with traditional landowners, was something most companies wouldn’t expect could result in the CEO and other senior executives losing their jobs. So this is one area that we’re reassessing within our ESG processes.”

In considering this ESG issue, Pendal:

• Held engagement meetings with the Rio Tinto Board to discuss how the matter should be handled in a way that minimises further harm to its social licence to operate
• Engaged with peers in the resources sector, as well as mining services and supply companies, about their cultural heritage management considerations and processes
• Improved the ways in which they highlight the need for this risk to be appropriately managed by companies

“Importantly, we started thinking about the broader implications for the rest of corporate Australia,” Jim said.

Find out more

• Learn more about our approach to responsible investing
• See our ESG and responsible investing FAQs
• Find out more about our diversified group of investment managers

Disclaimer: The information contained in this webpage is factual information and is of a general nature, and does not constitute legal, taxation or personal financial advice. It was prepared by GESB and Pendal Institutional Limited (PIL) (ABN 17 126 390 627). In providing this information, we have not considered your personal circumstances including your investment objectives, financial situation or needs. GESB is not licensed to provide financial product advice. Before acting or relying on any of the information in this document you should review your personal circumstances, and assess whether the information is appropriate for you. You should read this document in conjunction with the relevant Product Information Booklets and disclosure documents at gesb.wa.gov.au/brochures. You may also wish to seek advice specific to your personal circumstances from a suitably qualified adviser.

1 The Pendal Sustainable Balanced Fund was launched by the Bankers Trust group in 1984 as the BT Australia Charities Trust. Since then Pendal has continued to enhance its consideration of environmental, social and governance (ESG) issues, in both fundamental analysis as well as specific strategies.