What we do at MSE
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Investment screening objectives
In its investment screening activities MSE aims to identify and favour investment in ASX companies that 1) demonstrate social and environmental performance characteristics above sector peers and 2) respond proactively and appropriately to sustainability drivers in the market, thereby protecting and enhancing business value and shareholder value.
Business value
MSE defines business value as encompassing tangible benefits including traditional measures of financial performance, as well as intangible benefits including community standing and protection of human capital. For investment screening purposes, protection and enhancement of business value may include measures that seek to:
- ensure compliance with relevant legal and regulatory requirements
- protect license-to-operate and company reputation
- ensure that benefits from company activities are optimised for key stakeholder groups including employees, business supply chains, customers, and communities, whilst minimising adverse impacts
- reduce environmental impact and ecological 'footprint' through eco-efficiency measures, technological innovation, and best practice management
- modify and adapt existing product lines and services in response to sustainability drivers
- exploit opportunities for commercially viable products and services in response to emerging sustainability markets.
It is recognised that sustainability issues impact industry sectors and companies differentially and over variable time scales, and therefore the effort required and business value that may be attained through company sustainability initiatives will also vary. The degree of importance placed on company actions is therefore dependent on company exposures to sustainability drivers.
Sustainability assessment principles
A sustainability driver refers to an external influence that has the potential to impact the company by generating risks and/or opportunities. A sustainability driver may include pressures exerted through:
- policy, legislative, regulatory or legal developments
- changing market conditions or consumer expectations
- resource availability and technological change
- legacy issues
- changing community expectations
- more stringent industry standards.
Sustainability drivers may be short term or long term, and therefore the company actions required to address sustainability drivers will vary accordingly. For investment screening purposes, analysis of sustainability drivers encompasses both short and long-term drivers, however expectations of company actions in response to such drivers is reduced where drivers are immaterial in the short to medium term. The extent to which a driver is material to a sector or individual company is referred to as a sustainability exposure.
Company efforts to mitigate exposures to sustainability drivers are referred to as company responses. Responses may be initiated at a variety of levels in the company including but not limited to:
- business strategies
- governance structures
- management policies, systems, and practices
- operational initiatives
- technology development and adoption
- marketing strategies, product development, and product placement
- stakeholder interactions and communication.
MSE defines a sustainability risk as the difference between the exposures to company specific sustainability drivers, and the company responses. The nature and magnitude of company sustainability risks will therefore vary accordingly.
Industry partnerships
MSE offers partnering opportunities with industry to advance the development of sustainability assessment tools for financial applications including:
- research partnerships and collaborations
- industry consulting
- specific issue or sector-based research programs
- provision of research for financial products
- enhancement of risk assessment and evaluation processes
- training and professional development
- industry short courses
- postgraduate programs
Recent finance sector activities
Social/environmental
risk rating - BT Governance Advisory Service
MSE conducts research into social and environmental risk
for ASX 200 companies to support a Governance Advisory Service developed
by MSE and the BT financial Group (formerly Westpac Investment Management).
The governance service is implemented as an overlay across the entire
domestic equity portfolios ($4.5billion) of the CSS-PSS, VicSuper, CSF, and NTS
super funds, Australia's largest mandate to integrate social
and environmental factors in portfolio management. The proprietary
methodology developed by MSE over a 14 month period utilises conventional
risk assessment tools, incorporating detailed analysis of financially
material social and environmental risk. MSE commenced implementation
of the overlay in November 2001, and has since engaged more than
150 ASX companies on materially significant risks covering issues
ranging from WH &S,
energy use, GHG emissions, work practices in the supply chain, and
electronic gaming machines. MSE reports regularly to the Boards of
the client funds to advise on governance issues relating to social
and environmental risks impacting ASX 200 companies, provide advice
on research and dialogue outcomes, and prioritise issues for research.
Sustainability rating - BT Financial
Group
MSE constructs sustainability ratings
for the top 200 listed companies listed on the Australian Stock Exchange
under contract with the BT Financial Group (formerly Westpac Investment
Management). The ratings encompass both social and environmental
performance aspects, using a proprietary best-of-sector methodology.
MSE pioneered the development and implementation of the best-of-sector
approach in the Australian market in 1998-1999, providing the foundation
for the introduction of the first SRI fund to be offered by a mainstream
financial institution (Westpac Investment Management). In collaboration
with BT, MSE developed processes to factor social and environmental
assessments into financial assessments to determine investment suitability
for institutional clients. MSE also conducts extensive engagement
with ASX companies rated, and implements a 'Watch' process
linked to significant events (ie. mergers, acquisitions, incidents),
advising BT on stock holdings where such issues are material.
Environmental performance rating - BT Financial
Group
MSE is currently rating the environmental
performance of the top 200 companies listed on the Australian Stock
Exchange. MSE's ratings are used to develop the Westpac- Monash
Eco Index, and the Australian Eco Share Fund. Tailored assessment
instruments are applied for each of the 23 industry sectors in the
ASX.
Social and environmental risks
in lending - Major Australian Bank
MSE
is undertaking a corporate wide project with a major Australian bank
to enhance and deepen credit risk policies and procedures to address
social, environmental, and reputation risks. The project involves
development of processes, systems, and training to facilitate assessment
of the impact of social and environmental risks on credit worthiness,
asset value, and reputation for corporate lending, institutional
lending, structured finance, and SME lending. MSE also developed
a detailed position on the Equator Principles to establish risk exposures
and potential benefits to the bank, and to provide a basis for policy
and possible adoption. In conjunction with its project partners,
MSE assisted in benchmarking the practices of a range of international
banks with respect to social/environmental credit risk assessment
and procedures. MSE is currently developing detailed risk assessment
tools specific to the banks key market and industry segments and
will advise on policy, systems development, and training to integrate
tools into the bank's credit assessment processes.
Environmental strategy development - Major
Australian Bank
MSE assisted one of Australia's
largest banks to review and enhance its corporate environmental strategy.
An assessment of the Bank's performance across all major business
units was undertaken including commercial lending, investment management,
and insurance. The assessment focused on the incorporation of both
environmental risk and identification of market opportunities relating
to specific business activities.
Reporting
of social and environmental lending practices - Major Australian
Bank
MSE reviewed systems for reporting
lending exposures in relation to social and environmental factors
for a major Australian Bank. The review was conducted to enhance
protocols and improve external reporting.
Review
of corporate environmental disclosure guidelines - Major Australian
Investment Institution
Reviewed and enhanced
environmental disclosure guidelines developed by a leading investment
house. The guidelines were developed to encourage greater disclosure
of materially significant environmental risks by ASX companies to
improve understanding of investment risks.
Review
of corporate environmental disclosure guidelines - Major Australian
Investment Institution
Reviewed and enhanced
environmental disclosure guidelines developed by a leading investment
house. The guidelines were developed to encourage greater disclosure
of materially significant environmental risks by ASX companies to
improve understanding of investment risks.
Environmental
strategy development - Major Australian Bank
MSE assisted one of Australia's largest banks to review
and enhance its corporate environmental strategy. An assessment of
the Bank's performance across all major business units was undertaken
including commercial lending, investment management, and insurance.
The assessment focused on the incorporation of both environmental
risk and identification of market opportunities relating to specific
business activities.
Sustainable
Finance Strategy Development - Commonwealth Government
MSE recently assisted the Commonwealth Department of Environment
to develop strategies and identify programs to facilitate sustainable
practices in the Australian financial sector. A comprehensive review
was undertaken of the key financial sectors of insurance, investment
and lending to identify drivers and trends, key stakeholder issues,
leverage points, and information requirements.
Trustee Information Program - Environment Australia
In 2001, MSE led a project in collaboration with the Australian
Institute of Superannuation Trustees (AIST) and KPMG to disseminate
information on Socially Responsible Investment to superannuation
trustees and finance sector professionals. Printed and electronic
materials were developed, including a comprehensive web site on SRI
in Australia. A series of open forums and targeted briefings were
designed to give trustees and their advisors confidence in evaluating
and selecting SRI strategies for their funds.