Environmental, Social and Governance Policy
Providence Independent Investment Advisory acknowledges that in recent years there has been a growing preference for accountability outside the realms of financial performance. Individual and institutional investors have grown wise to a global focus on sustainability; they are looking for disclosure of and action on environmental, social and governance (ESG) risk.
When looking at investing in a diverse portfolio, it is important to understand more than just a company’s financial and operational goals. An awareness of non-financial risk protects against adverse issues down the track, which may impact on a company’s performance in the long term. Understanding ESG risk ensures that an investment portfolio is congruent with investors’ values and beliefs whilst ensuring long-term sustainability.
What are ESG risks?
The Environmental, Social & Governance categories cover a range of behaviours and situations that can prove to be risks or opportunities, depending on how they are treated. Climate change is one such environmental risk that should be factored into decision-making; there are financial costs associated with carbon regulation, and reputational issues can arise from contributing to pollution.
Labour and human rights factors are attributable as social risks; accidents and suicides due to poor OHS standards create legal and reputational issues, not to mention lost time and interrupted production due to industrial action. Consumer/employee satisfaction and stakeholder engagement are examples of other social risks that can lead to similar repercussions. These events can affect human capital management, negatively disrupting operations and derailing employee engagement.
Governance factors are important outside the boardroom; these are associated more with oversight of business operations rather than the traditional corporate strategy role a board plays. Companies (particularly with international operations) experience social and political instability and local community conflict, which can lead to crime and corruption. Those engaged in the resources sector internationally, for example, must take into account risks around security, bribery, misconduct of local employees and expat exposure to corruption. Information technology and social media traders must take into account the risks surrounding privacy and civil liberties, which can leave them vulnerable to legal and reputational consequences.
Providence requests that each fund on our Approved Product List (APL) provides details of their ESG policy, including whether or not they are a member of the Responsible Investment Association of Australasia (RIAA) or a signatory of The United Nations Principles of Responsible Investment (UNPRI).
The UNPRI is voluntary and provides a framework for integrating ESG considerations into investment decision-making. The six principles provide guidance on the following:
- Incorporating ESG considerations into investment analysis and decision-making processes
- Being active owners and incorporating ESG issues into ownership policies and practices
- Seeking appropriate disclosure on ESG issues from the entities invested in
- Promoting the principles within the investment industry
- Working collaboratively to enhance the effectiveness of the principles
- Reporting progress on implementing the principles
Not every fund manager on our APL may be ESG focussed. However, we incorporate a higher weighting in favour of those who are and keep a record of their compliance. We also include an ESG filter for all direct investments.