ESG Factors Given Priority

In discussing sustainability related issues, participants typically used the ESG framework to classify the various factors that are important to their own business or the businesses they invest in. There are many of them.

Environmental Factors

With RMBS being the dominant asset in the Australian securitisation market, it was no surprise the focus of participants was on housing when talking about the E in ESG. In fact, participants considered the role of securitisation in delivering 'green' assets as opposed to considering the environmental impact of the issuer or originator. This was in contrast to social and governance factors, where it was more common to consider the behaviour of (and within) a business. Addressing climate change dominated the response for housing and office properties, with carbon footprint, energy efficiency, solar and battery use commonly noted. Factors like location of assets (e.g. flood plain, fire risk areas), building material usage, the paperless office and lending for sustainable causes were raised by just a few.

Social Factors

A long list of social factors were mentioned. Some noted the potential to offer loans and pooled loans which deliver a social benefit. Several pointed to the difficulty some groups in the population have in getting access to credit. Affordable housing was another area raised in the context of the potential for social based securitised assets. However, the vast majority of social factors raised related to the business. These included relationships with employees, the community, customers and suppliers, lending practices, and investment.

Employees dominated the thoughts of participants in talking about their own business or the companies they deal with or invest in. Employee wellbeing, diversity and inclusion, safety and worker conditions were all raised as factors relevant to sustainability. Of the broader social issues, modern slavery, social risks of Buy Now Pay Later, support of developing countries, and human rights in supply chains are all on the minds of participants. The key issue with social factors is the qualitative nature of many of these factors and the difficulty in their measurement.

Governance Factors

The majority of participants are confident that governance factors are adequately assessed. Investors, in particular, have always had a strong focus in this area as it forms part of their risk assessment – most commonly the businesses’ management team and the risk framework. New factors are being considered as a more formal approach to sustainability and ESG is adopted by issuers. Board diversity, consumer expectations, a formal focus on sustainability and the integrity of their partners and suppliers are emerging factors. The major banks have well established sustainability related governance policies, but regional banks are often less advanced in this area. Investors are seeking out ESG philosophies and frameworks as well as making assessments of ‘business conscience’.

The management team and the risk framework are the governance factors reviewed most thoroughly.

In summary

When it comes to the primary focus of industry participants on ESG factors, three areas dominate.

Environmental

Climate change

Social

Employee wellbeing

Governance

Management behaviour

As investors increasingly request details of an issuer’s ESG credentials, the above are near-mandatory inclusions in pitch documents and roadshow presentations.