Market commentary: Jun 2023
Portfolio performance
Inflation continues to be a big story in markets, but it seems it is now under control. US inflation cooled to 4% for the year to 31 May, and, as generally predicted, the Federal Reserve kept interest rates unchanged at 5.00 to 5.25% and signalled a 0.50% increase later this year. Our Reserve Bank boss, Adrian Orr, says he’s confident that further rate increases are not needed. For our clients, it’s also nice to see positive investment returns over the last six months and year to 30 June and returns since inception recovering. Share price increases in Australasian and international markets have been a big help and, while property and international fixed interest are recording unrealised capital losses, cash flow from these investments is expected to increase over the next year due to higher interest rates.
ESG – aligning investment objectives with values
Ever since the dawn of the industrial revolution, there’s been tension between economic development and corporate growth on the one hand, and the impact this has on the planet and society. In the late 1990s, investors began to recognise the importance of considering non-financial factors in their decision-making. This recognition evolved into the Environmental, Social, and Governance (ESG) framework used to evaluate the sustainability and ethical impact of corporations. Today, ESG measurement and scoring is a driver of corporate behaviour and encourages responsible investment practices globally.
Looking at these factors one by one:
Environmental factors assess how a company’s operations and practices impact the natural environment, for example: carbon footprint, resource and energy consumption, waste management, and efforts to mitigate climate change.
Social factors examine a company’s impact on society and include things like the treatment of employees, labour practices, community engagement, controversy assessment, product safety, and customer satisfaction.
Governance factors focus on the company’s organisational structure, leadership, and transparency. This involves evaluating the quality of corporate governance, board diversity, executive compensation, shareholder rights, and business ethics.
The evaluation process typically includes gathering data from public disclosures, company reports, and third-party sources. The data is analysed and assigned as scores or ratings of a company’s performance in each category, and an overall score is calculated.
Fund managers analyse both quantitative (numbers/hard data) and qualitative (management competency, strategy etc.) information when making decisions to invest. Because company ESG scores are numbers they are quantitative and assessed alongside financial information. It’s no surprise that companies with strong ESG scores are seen as likely to be more resilient and better positioned for long-term success.
It gives us hope that investors now have a tool that helps align investment objectives with values and also helps manage risks, identify opportunities, and contributes to a more sustainable and equitable world.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser