Setting principles and boundaries needed for ESG

Superannuation trustees need to identify what it means to have environmental, social, and governance (ESG) strategies in their portfolios, according to State Street Global Advisors (SSGA).

SSGA head of corporate governance, Rakhi Kumar, said when implementing ESG, super fund trustess needed to first figure out what their beneficiaries' interests were.

"The real issue is ‘what does it mean to have ESG?' Does it mean that you're not doing ESG in an index fund or an active fund? No it doesn't necessarily mean that and I think that's the debate they're having, and that's the debate the market is having," Kumar said.

Kumar said the second step was to identify high-level principles and philosophies that the trustees wanted to incorporate into the entire organisation.

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She then said it was about establishing guidelines or boundaries to what the portfolio wanted to achieve in terms of returns.

"The boundaries provide management direction. You don't want them to get involved in very specific decisions but you want to give management the direction and setting those guard rails and limitations gives room for different kinds of solutions that can be provided," Kumar said.

Kumar noted the other issue was figuring out how to integrate ESG into portfolios.

"Trustees need to ask does it mean integration? Does it mean supervision? Those are the kinds of debates which any portfolio managers will have. What exactly should the portfolio look like, what am I giving up if I'm doing passive investing? Does it mean I'm giving up ESG altogether? No, it doesn't," she said.

"Just because they're passive investing it does not necessarily mean passive ownership. And having debates asking ‘what does internal stewardship look like?' is needed. It's not because of a lack of knowledge; it's more about truly trying to do the right thing while keeping returns."