GLOBAL - The short-term nature and focus of financial markets is inhibiting the consideration of environmental, social and governance (ESG) issues in capital allocation and could harm long-term investment performance, First State Investments warns.
First State, known as Colonial First State Global Asset Management in Australia, made the claim in its fourth annual Responsible Investment Report, which recommends investors should put a greater emphasis on pricing ESG issues into every investment decision.
It added these factors have a significant impact on company performance, with recent research demonstrating the top rated ESG stocks in its Global Listed Infrastructure portfolio outperformed the bottom-rated stocks by more than 20% over the three years to May 2010.
First State CEO Mark Lazberger said the investment industry was showing signs of improving, but needs to go further to achieve best practice ESG management.
"As a fiduciary it is our responsibility to make the best possible investment decisions on behalf of our clients, he said. "Critical to that process is appropriate consideration of environmental, social and governance issues as these factors significantly impact long-term company performance.'
First State managing director in charge of distribution across EMEA, Kanesh Lakhani, added: "As part of our approach, ESG issues are considered across all of our funds in the same manner as other investment-related issues. In our view, this is the most effective way of incorporating key sustainability issues in all investment decisions, which allows us to protect our clients against ESG-related risks and enhance the investment performance of our strategies.'
The annual report also claims First State, the fund management business of the Commonwealth Bank of Australia, has outperformed most other signatories of the United Nations Principles for Responsible Investment (UNPRI) in the course of 2010, achieving higher rankings than the combined average scores of investment managers globally on all six principles. The principles include pledges to incorporate ESG issues into its investment analysis, decision-making processes and ownership policies.
Lazberger added: "We have built performance metrics into our strategic planning process and have defined success as incorporating six key Principles of Responsible Investment into all areas of our business.
"It is pleasing that since signing the UNPRI in early 2007 we have made significant steps towards achieving this target and now sit in the top quartile in four of the six principles. We are currently focussing on principles two and three and are actively seeking to achieve top quartile rankings across five of the six principles in 2011."
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