As ESG exploded from niche to investing’s front line, it took Melior with it

While ESG can mean different things to different people, Steed and King decided to use the United Nations’ 17 Sustainable Development Goals as their investing framework. What that means is that Melior looks to invest in companies that are helping to address a range of global challenges – and exclude those earning more than 5 per cent of revenue from industries that detract from them – such as climate change, sustainable infrastructure, health, education, waste and recycling.

As an example, they point to companies supplying the critical minerals the world urgently needs for renewable energy, such as copper for power lines, or lithium for electric batteries. “Sustainable Development Goal 7.2 is increasing the share of renewable energy in the global energy mix, so direct lithium extraction-exposed stocks are relevant to this one,” Steed says.

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Beyond choosing which companies to invest in, another tool for Melior is active corporate stewardship – the practice of directly engaging with companies to improve their performance and level of ambition on ESG metrics, whether that is decarbonisation targets or gender equality. Steed sees helping influence large companies in the ASX300 as a significant way to drive large-scale change.

“When you look at the ASX300, that represents 2 million employees and about one-third of Australia’s Scope 1 emissions,” Steed says. “As companies look to improve, they can have a significant delta impact as they drive forward.”

On the simplest level, incorporating ESG data into decision-making can help safeguard investments from financial risks, whether that is exposure to the physical, reputational or regulatory risks of climate change, costly industrial relations disputes for mistreating workers, or human rights issues in supply chains resulting in litigation. But as time has passed, adds King, there is also a recognition that ESG can offer a lucrative “value lever” for both investors and companies that get it right.

“If they can produce those products and services that we need … and produce them in the most sustainable way, that’s good for their business, through lower reputational risk, attracting employees, satisfying customers, and a lower cost of capital,” he says.

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ESG-minded investing has rapidly moved from being considered “something on the side” to front and centre, King says. So much so that companies Melior doesn’t own are contacting King to ask him to present to their boards.

“There is an increased realisation that sustainability isn’t just box ticking – where the rubber hits the road is that this is actually important for the value-creation of a business,” he says.

Since its inception, it has ranked in the top quartile of Australian equities funds and its returns have outperformed the ASX300 benchmark. Steed says Melior’s performance should dispel the view among some ESG critics that there is an inherent trade-off between returns and impact in socially responsible investing.

“For us, it’s about increasing that profile and demonstrating that you can have both,” she says. “The more we speak to investors, the more that’s what they are looking for, too.”

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