Innovatia

• having effective governance structures to aid decision-making and overall firm man- agement. From this perspective, sustainability metrics capture the degree to which a firm addresses stakeholder interests. The stakeholder view posits that good practices are ultimately re- flected in superior financial performance. The rise of member-directed superannuation funds in Australia is now converging with an appreciation of a new economic theory of the firm. There is hardly a more important engage- ment to be had than to ensure that individuals are aware of how their retirement incomes are being derived. This investment thematic will become en- trenched in the mainstream during the coming decade, with many implications for the pro- fessional services industries, from advice to investment management. Focusing on ESG as a stock-selection rule-of-thumb is appealing; however, experience tells us that the invest- ment challenge is never that simple. Incorporating sustainability within an invest- ment approach Many approaches to incorporating sustainabili- ty in equity portfolios are based on a process of exclusion. This stems from a principled position of not wanting to support companies involved in “unacceptable” practices or products. When considering exclusions based on sus- tainability grounds, investors should be aware of the risk such exclusions introduce to their portfolio relative to standard benchmark port- folios. In some instances, the risk may be irrel- evant and, based on principle, investors should

portunity of focusing on sustainability • other investment characteristics investors are seeking. Sustainable investing towards 2030 The 2020s will usher in a massive wealth roll- over from superannuation to retirement. This is a natural point for individuals to consider many aspects of their life, including legacy. It is easy to foresee that there will be a convergence across equity strategies. Socially responsible investment options remain somewhat niche at present but are likely to become mainstream as the decade unfolds. All parties need to appreciate that investing solely on sustainability criteria is insufficient. Sustainability is a necessary criterion for the long term, but it should be combined with a range of other stock-selection disciplines to de-

liver cost-effective and risk-efficient outcomes for investors. The size of the Australian savings market through the next decade will provide an un- precedented opportunity for Australian inves- tors to drive sustainability issues across the globe. Investing over $2 trillion naturally leads to having exposure to a wide range of assets in all jurisdictions. We should grasp this oppor- tunity and strive for greater sustainability and social responsibility. This is how we can have a positive impact on our future and that of gen- erations to come. Max Cappetta is the CEO of Redpoint Investment Management. He was previously a co-founding shareholder of Continuum Capital Management and a Partner, Executive Director and Head of Australian Equities at GMO Australia Limited.

“ Without the option of innovation, at the very least, business becomes inefficient and dysfunctional.“

simply reset their “benchmark” to include only those companies that pass their sustainability tests. Alternatively, investors may consider a more activist approach. This could entail hold- ing a below-benchmark position in poorer-rat- ed companies and then using this shareholding to lobby management to change its practices. Redpoint believes that economic, environ- mental, social and governance (EESG) practices of companies can provide valuable investment insight. This view is founded on our investment thesis that EESG, a measure of “sustainabili- ty”, offers a new perspective on the quality of company management. Sustainability refers to “good corporate practices” regarding compa- nies’ interactions with the broader economy, the environment and society, and their ap- proach to governance. Whether investors exclude or downweigh, there remains ample scope for active manage- ment to be overlaid to build new investment strategies. Successfully meeting multiple in- vestment objectives is not easy but certainly possible. Investors should clearly understand the interactions between: • their own principled position with respect to sustainability • their investment thesis of the return op-

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INNOVATIA

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