Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Emilie O’Neill: Fighting the ‘ESG trade-off’ perception
When Russian tanks rolled over the Ukrainian border on 24 February, it sent shock waves through the world’s energy markets. The prices for fossil fuels surged, with oil topping $US120 a barrel for the benchmark Brent Crude.
For those committed to a decarbonisation strategy to tackle climate change, it was a rude awakening. Russia’s brazen manipulation of energy supplies, forcing higher and more volatile energy prices in a tight market, reignited arguments around the ongoing need for fossil fuels – at least in the near term.
Well, that’s the glass half empty version. For Emilie O’Neill, Co-Head of ESG & Equities Analyst at asset manager Perennial Partners, the argument is better framed as a glass half full.
“In my view, the challenges we are seeing on energy prices and energy security have strengthened the argument for renewables and alternative energy, especially long term,” O’Neill says.
“It has highlighted the vulnerability of countries to fossil fuels and the need for security over supply – alternative forms of internal energy that can help reduce reliance on offshore markets. The opportunity cost of investing in alternative energy and low carbon solutions has also fallen with the price of traditional energy, making them more cost competitive. Remember, 90 per cent of the globe’s GDP is committed to net zero, and 2050 is only getting closer.”
Certainly, for O’Neill and her tight-knit team running Perennial’s Better Future fund, which invests in smaller and mid-cap companies with an ESG focus, there is no retreat. And it’s not just on ESG grounds. The science-commerce graduate from ANU and UNSW is emphatic there is no performance trade-off from ESG investing.
“The reality is the opposite. Companies with sound ESG credentials outperform. Sometimes, the market thinks we prioritise ESG factors above investment fundamentals, but the reality is that it’s just another investment lens. All the team have strong backgrounds in financial investment, knowing the importance of investment fundamentals such as the customer base, global market opportunity, product demand, P&L profitability, and a strong balance sheet preferably net cash. We wouldn’t invest in a stock simply because of its ESG credentials without sound fundamentals, and vice versa, and we have proved we can do both since the fund’s inception five years ago.
“It means we attracts two types of investors – those looking for a fund with a robust ESG strategy that is going to suit an ethical investor and then those looking for a strong performing small caps fund who aren’t as focused on having ‘ESG’ credentials.”
That O’Neill is passionate about ESG should not surprise. Growing up in the NSW Southern Highlands, her father instilled in her a care for the environment. “A country person in tune with nature, he taught me a lot about protecting the environment, to the extent we would often rescue injured animals together,” she recalls.
“I took this grounding into a high school that was socially progressive, sitting on the Environmental Committee. Then, doing science at university made me more aware of environmental issues, and on joining Morgan Stanley full-time in 2017 it gave me access to ground-breaking ESG research.
“At the same time, the ESG conversation was gaining momentum, especially in Europe, and I grabbed every opportunity to remain informed. At this time Australia was on the fringes, but it was evident to me it had to become mainstream, and that investment strategies would increasingly have to inculcate an ESG strategy.”
For Perennial, ESG demands a holistic approach. “Many market participants focus on the ‘E’. That’s understandable when you consider the transition to net zero will require spending an estimated US$2.8 trillion a year on environmental solutions for the next decade – an enormous investment opportunity.
“But we firmly believe ‘E’ cannot come at the expense of ‘S’ or ‘G’. We are seeing the importance of getting governance right with the recent cyber attacks at Optus and Medibank. All companies can expect a cyber attack, so how they prepare for it is critical. Companies that don’t will face increasing regulatory scrutiny and potential consumer liability.”
On ‘S’, board diversity is a critical element in whether a company becomes a ‘buy’.
“A diverse board will have different backgrounds and thought processes that will help the business better manage risks and opportunities,” she says. “It also drives diversity through the organisation which, in our experience, nurtures a healthy corporate culture that generates improved employee performance, helps retain staff, and attracts talent.
“It’s a source of enormous pride to me that we have been able to influence companies on issues such as board diversity and sustainability. That it typically goes with improved market performance is the icing on the cake for investors in the fund.”
