In an age of tarnished corporate reputations, royal commissions into financial services, and deep mistrust about our banks, it is a telling moment when a new fund manager emerges with an impact investing focus on companies that have their priorities fixed on doing good.
From left to right, Melior team: William Wu, Vanessa Kokkinakis, Lucy Steed, Tim King, Julia Bailey
Melior Investment Management has been operating for five months, but it took more than 18 months to provide the deep research framework that distinguishes the fund manager’s approach.
Melior CEO Lucy Steed says one of the key considerations in equities is “additionality’’. “Impact in the unlisted space has traditionally been about capital,’’ she says, “but how do you create additionality in equities when the companies don’t require your capital to operate?’
The Melior response to this question is through advocating companies on what is called ESG or environment, social and governance investment standards. And the framework for assessing it is through the United Nations 17 sustainable development goals (SDGs). On the face of it, those 17 goals are general and uncontroversial – ending poverty and hunger, for example – but Lucy has devoted time to delving in to the 169 sub-goals and tried to identify the goals most relevant to Australia.
“We wanted to establish an integrity product. Not SDG bingo,’’ Lucy says.
“And we know that more people now want to invest with their heads and hearts aligned.’’
After meeting more than 200 corporates – executives and boards – and discussing Melior’s approach, Lucy knows there is an appetite for the conversation.
“In the past year or so, we’ve seen the royal commission [in to financial services], and the attendant reputational risk has elevated this conversation in corporate Australia. We’ve seen it first hand and it’s certainly not a conversation that we could have had five years ago,’’ she says.
On the ground, there is still significant work to be done to transform corporate Australia’s acknowledgement of the issues in to action. Melior’s own research found that the majority of the 300 companies on the Australian Stock Exchange did not report their carbon emissions and less than 25 per cent of the companies have emission reduction targets.
That doesn’t mean Melior has ruled out dealing with some corporates, most particularly mining companies: its position is more considered and nuanced than that. “The important thing is understanding what it will take for us to arrive at a low carbon environment,’’ Lucy says. “What do we have to mine? And how do we avoid unnecessary harm and take a holistic approach to the problem that looks at what changes we have to make to ensure we get to the low carbon outcome.’’
The approach is designed to be objective, rigorous and also flexible. Early evidence points to a significant upside for investors who are guided by ethical priorities. This year’s Responsible Investment Benchmark Report observed: “…Australian figures contributing to the overwhelming body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet.’’
But Melior does have a list of industries it has excluded from potential investment. Companies cannot earn more than five per cent of their revenue from: gambling, armament manufacturing, tobacco manufacturing, uranium production and nuclear energy, alcohol manufacturing, highly processed food and sugar-sweetened drinks manufacturing, pornography production and thermal coal, gas, tar sands and oil production.
Melior will invest in Australian and New Zealand equities. Size is not a consideration but alignment to the SDGs certainly is. In time, Melior’s focus on wholesale managed funds may move in to the retail sphere, where there are clear upsides and potentially greater scale.
One of Melior’s backers is Rob Koczkar, who in 2010 helped create Goodstart Early Learning, the childcare group that became Australia’s largest social impact investment project, arising out of the rubble of ABC Learning. Nine years after Goodstart, the change in corporate behaviour is observable but probably not quick enough. Despite some recent breakthroughs with ANZ announcing its involvement with two sustainability loans (one at Sydney Airport and the other at Synlait in New Zealand), there is still little movement to embrace the SDG priorities within the banking sector. On Melior’s analysis, only Westpac of the big four meets Melior’s ESG assessment criteria. But there is room to change, and plenty of awareness now about the value of values-based investment. All of which explains why Lucy and co-founder Tim King called their new operation “Melior’’ – it’s Latin, for “better’’. And the priorities are for “better’’ investment outcomes that reflect the importance of a “better’’ world: simple but effective.