Reducing volatility with better ESG assessments

2 MARCH 2023

Risk management has always been part of financial advice and investing. It is now more important than ever. As are new risk assessment tools, says Australia’s leading wholesale trading platform AUSIEX.

In what is a first for the advised space, AUSIEX has collaborated with Morningstar Sustainalytics to offer ESG Risk Ratings value-adding capability to its clients.

“We are pleased to continue to offer additional value to our wholesale trading clients with ESG Risk Ratings” said Mr Brett Grant, Head of Product and Trading at AUSIEX.

“Investors need to prepare for a range of possible outcomes – and new assessment tools are helping.”

For example, Mr Grant said rising interest rates were driving down company earnings, and company valuations overall. Central banks in the US, Australia and elsewhere are adding further macro-economic headwinds by continuing to remove money from the local and global economy via quantitative tightening.

“Investors need to be aware of highly leveraged companies, as money isn’t free anymore, let alone cheap. A larger slice of earnings will go to service debt. Companies that can fund their own growth will have an advantage over their competitors. By contrast, companies with resilient earnings, normalised inventories and reasonable valuations should fare better. Producers of physical assets will likely receive more attention than those promising intangible upsides.”

A new quality factor for defensive assets

Looking at value and quality are other well-known assessment factors, said Mr Grant. “As is increasingly ESG (Environmental, Social & Governance) considerations, and not just the ‘green’ factors. Besides how companies address environmental concerns, how corporate management responds to social and governance issues, is becoming increasingly important.

“A greater focus on ESG principles can form a defensive investment strategy, even help de-risk portfolios,” suggested Mr Grant.

“Trading in the wholesale and sophisticated investor market is about much more than price of individual share trades, it is also about downside protection and these new tools can potentially provide advisers and investors with an added layer of protection should shocks materialise” Mr Grant said.

The AUSIEX ESG Risk ratings tool assesses indexes S&P/ASX200 companies and selected exchange traded funds (ETFs) providing dynamic scoring and ranking of ESG risk factors for companies through to whole portfolios.

Mr Grant added: “The ESG Risk Ratings are designed to help advisers and investors identify and understand financially material ESG risks and how they might affect the long-term performance of their share market investments, a benefit to some in a largely risk-off climate at present.”

It measures each company’s exposure to industry-specific material ESG risks, and how well that company is managing those ESG risks. This is supplemented by further assessments that include:

• Corporate and stakeholder governance,
• Industry level ESG issues, and
• Idiosyncratic corporate ESG issues,
• Assessing carbon risk ratings with emissions research, and
• Controversy assessment covering a large number of news and media sources every day.

These assessments are then brought together to generate an overall and comparative risk score and insights into what the company management is (or is not) doing to manage ESG issues. These scores can then be compared against other companies to determine which ones are best placed to manage the challenge they face now – and in the future.

Morningstar Sustainalytics is a leading ESG research, ratings and data firm that supports investors around the world with the development and implementation of responsible investment strategies. For nearly 30 years, the firm has been at the forefront of developing high-quality, innovative solutions to meet the evolving needs of global investors. Today it has more than 1,800 staff members, including 800 analysts with varied multidisciplinary expertise across more than 40 industry group. For more information visit www.sustainalytics.com

Media information:
Guy McKanna
Honner
guy@honner.com.au / 0430 355 985

About AUSIEX

With over 25 years of experience in the local market and the backing of a multinational trading technology powerhouse, AUSIEX combines deep expertise with trusted and reliable technology to deliver trading solutions for financial institutions, intermediaries, advisers and industry participants. Owned by Nomura Research Institute Ltd (NRI), AUSIEX specialises in equities execution, clearing and settlement services and equities administration for the wholesale market.

As one of Australia's leading providers of trading solutions, AUSIEX has used its scale, expertise and heritage to deliver value for advisers, brokers, many large institutions and tens of thousands of their clients by seamlessly connecting them to markets.

Disclaimer

This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Share Trading is a service provided by AUSIEX.