As asset managers grapple with the complexities of sustainable and responsible investing under a tougher new regulatory regime, the fight to recruit genuine ESG specialists intensifies.
Greg Liddell, a former head of responsible investment at Suncorp Group, was recently snapped up by the fast-growing ETF provider BetaShares to run its ESG program.
At the start of his fund management career two decades ago, Liddell did not fully appreciate how valuable his credentials would become. His expertise puts him in a small cohort of specialists having both ESG qualifications and hands-on investment experience.
As a longtime investor in BetaShares ETFs, he was drawn to the firm's commitment to innovation and efficiency at identifying themes as well as bringing new funds to market.
But for Liddell to make this career change, the BetaShares ESG products had to be true-to-label.
"When investing in ESG products for my own self-managed super fund, I had a look at the range of funds out there and the extent to which they aligned with what I would consider true ESG values," he said.
"That's when I first became aware of BetaShares. The BetaShares products have an additional layer of oversight which means they weren't involved in activities which are inconsistent with principles of sustainable investment."
Rebooting the market
His appointment comes at a crucial time for Australia's superannuation industry, grappling with the Federal Government's Your Future, Your Super reforms.
There are widespread fears that the prudential regulator's performance and heat map tests will discourage super funds from investing in ESG strategies because they push funds away from the prescribed benchmark.
Liddell confirms that the tests are negative for ESG strategies because responsible investment techniques, such as negative and positive screening add to the tracking error against the Australian Prudential Regulation Authority benchmarks.
"A consequence of YFYS is to push conformity. The avoidance of tracking error is going to be a major factor in how funds are managed and how investment strategies are constructed," he says.
Very few people stay awake at night worrying about tracking errors in their portfolio; however, they do worry about climate change, pollution, human rights, and social justice.
Many of them care whether their superannuation fund's investment strategy is aligned with their values, he goes on to say. "These reforms will be a threat to some institutional ESG strategies."
"These reforms will be a threat to some institutional ESG strategies."
Liddell believes the heat mapping process and the performance test will give rise to unintended consequences.
For instance, Australia seems to be moving toward a superannuation industry with a small number of mega-funds running virtually identical strategies.
"I do question the idea of benchmarking on Choice products. Certainly, the regulator has a clear moral authority concerning default MySuper products. But where people are making informed decisions - and some of them want to ensure that their investments are aligned with their values - the argument for benchmarking is less valid," he says.
"It will also pull timeframes even shorter, and I think the last thing this industry needs is another reason not to think about returns over the longer term."
Liddell says this is very positive for ETF managers like BetaShares as people who want to align their investment strategies with their values will have more cause to invest through a self-managed super fund using ETFs.
"The upside of the whole Choice heatmapping exercise will be a greater focus both on investment strategy and on net outcomes. People are realising that via self-managed super, they can have a tailored investment strategy that invests in the green economy or avoids fossil fuels or companies with negative social impacts, at fees that are competitive with institutional funds."
Liddell is expecting a surge in SMSF funds and notes self-managed super is regulated by the ATO rather than by APRA.
One size does not fit all
As for his new job, Liddell notes that BetaShares has more than 60 products covering a wide range of asset classes and themes. And a one size fits all approach won't work as principles of fiduciary duty require ESG integration to align with the interests and concerns of investors.
He is tasked with monitoring BetaShares' ethical and sustainable products to ensure the approach to responsible investment is appropriate.
Liddell argues that while the integration process for a passive manager is slightly different from an active manager, there are still plenty of opportunities for sustainability principles to impact passive funds.
"Even with a passive product that is tracking a broad market index, you still have a responsibility for stewardship. For example, you have a responsibility to conduct engagement and proxy voting in a way that aligns with the interests of clients," he says.
Active fund managers integrate ESG into the processes they employ to value a company. They make sure that ESG risks and opportunities inform that valuation.
A passive manager doesn't do that. Integration comes into the product design - particularly with sustainability-themed products - through informing the index construction methodology, making sure the product is true-to-label.
"For example, if you are going to offer a product and make the claim that it excludes fossil fuels, then you should also make sure it excludes the banks which are funding fossil fuel expansion,' he explains.
Liddell says a current challenge for all ESG professionals is the lack of standardised corporate disclosure. "Greenwashing is an issue. Most companies say they are doing the right thing, but few offer the level of disclosure necessary for verification," he warns.
From where he sits, a positive thing to come out of the climate change conference in Glasgow - COP 26 - was the announcement of the development of international standards on the disclosure of non-financial metrics for companies.
They must be material, relevant, and permit comparability.
A priority for Liddell will be to advocate the adoption of those standards when they are set up and published.
The right stuff
The market might be running hot for talent, but there is a need to develop people with the right skills.
Liddell, who previously ran international equities at QIC, says there are still very few in the industry who could work with a manager to integrate a shadow price on carbon emissions into a valuation model or calculate the impact of exclusions on the tracking error of a portfolio.
Back in 2000, when he first started to focus on responsible investment, there were no academic courses on ESG. Liddell did, however, complete the Sustainable Accounting Standard Board's qualification in sustainable accounting.
Now there are a whole lot more options available. Universities offer sustainability courses, the PRI has its Academy, and the CFA a certificate in ESG Investing.
"All of which are worthwhile," he says.
"However, I continue to believe it's important for professionals in this space to have a solid grounding in technical investment understanding. You first have to know how a company makes money before you can understand how ESG issues can impact returns."