The team at Alvia Asset Partners are calling for greater scrutiny to ensure companies truly stack up as being pro-ESG.
Chris Scarpato talks to ausbiz’s Nadine Blayney about why it’s time to marry the narrative to the facts – and in turn, ensure ESG-friendly stocks really do stack up against the prices they bear.
So with that ESG lens on, let’s continue the conversation with Chris Scarpato. He’s joining us from Alvia Asset Partners and is here live via Skype. Hi there. Welcome to the program. Look, this ESG issue is equally exciting and also vexed. How do you view ESG investing there at Alvia?
Yes. Thanks, Nadine. Thank you for having me on the show. I think to bring into summary, we, as an investment team, have always considered ESG as part of our investment process. We’ve never called it out as something in isolation. And I think that’s really important because all businesses and all industries have a myriad of different risks. So for us, it’s just part of making a good investment decision. We manage money for high net worth individuals, and we’re obviously focused on preserving wealth across a number of generations for these families.
So it would be irresponsible for us not to consider those factors as part of our investment process. So, Josh, our chief investment officer and sort of highlighted that as embedding that as part of our overall investment process when we look at investment opportunities.
You can go wrong or you can be, not fooled, but sometimes you’ve got to really look at what’s under the hood. So is there also the chance for mispricing of some companies in the Australian marketplace in terms of ESG?
Yeah. I think it’s a really good point Nadine and we’re seeing that in particular in the Australian market and probably more pronounced in the Aussie market than it is overseas. I think the Westpac announcement is quite synonymous with what’s going on across the broader market. We’re seeing a new fund that’s being set up that is focused on clean energy or green investment everyday. But the thing that strikes us is there’s no independent arbiter providing an objective view on what is a green investment.
So if we use an example of one of our investments Aurizon Holdings is a really good example. Aurizon hauls metallurgical coal, which is a key input into iron-ore production. Now, in our view, it begs the question as to whether that is a negative ESG investment since it’s providing the opportunity for countries like China to urbanise, and you’re seeing rich valuations on other iron ore equities such as Fortesque. They do have thermal coal exposure, but it’s a small part of the portfolio. So that’s a good example where you’re seeing some of these stranded assets come into the market, where funds are being pushed by this thematic not to hold companies that are perceived as ESG negative.
There’s a flip side to that as well, isn’t there? How do you view some of these companies that score well, in terms of ESG, but that’s subjective as well, isn’t it?
It is exactly right Nadine, I think there there’s still a lot of subjectivity in the assessment of ESG. If you look through a lot of the ETFs out there that are sort of winning a lot of money for these green investments, there’s not really any sort of clear definition of how a company is considered to be ESG positive, and one that’s considered to be ESG negative.
For example, there’s an ETF that is focused on Catholic values that owns a position in the Altria Group, which is one of the world’s largest tobacco producers.
So I think when you look at the way these funds score ESG investments or ethical investments, there’s still a lot of discretion and subjectivity. And then you and me and investors out there have all got a view of what we see as being real ESG investment. So there’s still a lot of subjectivity, every way you look.
Yeah. Okay. Well, listen, we are out of time. But, Chris, I’d love to pick this conversation up at a later date to get a little bit more as to what you’re holding and what you’re not.
But, you’re still comfortable, just to sum up, with Aurizon, even though it’s been put in the negative basket by some ESG filters?
Yeah, that’s right. I’ve noticed that two other companies you picked up there, obviously being Afterpay and Transurban. So yeah, I think just on Aurizon, they’re making a push to improve their operations. They operate trains to haul coal from mines to port. They’re obviously trying to reduce their carbon emissions from those. They’re also reducing the amount of thermal coal exposure within their portfolio. They have a lot of contracts to transport metals for battery production and solar panels.
I think all companies out there have environmental considerations. It feels like at the moment, it’s the companies that are shouting the most are the ones that are able to tout their ESG credentials more than others. And looking at the other two [companies]. So Afterpay being a good example of providing availability of credit to younger consumers. There are social considerations with that product that they offer in the sense that these younger people are potentially getting themselves into debt and buying products with money they potentially don’t have yet, there’s social considerations there.
And then the third one being Transurban, and the fact that Transurban itself might not be generating carbon emissions from their road network, but it’s the cars that are using the road. In Australia, we’re sort of 99% internal combustion engine cars. So there’s still a lot of carbon emissions from the users of their products and service.
Well, just proving that there’s a lot going on under the hood in terms of ESG and many, many different views on what it is, exactly. So thank you for joining us, Chris, from Alvia Asset Partners.
Not a problem Nadine. Thank you for having me.