Telum Talks To... Pru Bennett, Partner at Brunswick Sydney
Telum’s Tim Williamson caught up with Pru Bennett, Partner at Brunswick in Sydney. Pru describes herself as an active participant in the public debate on governance, stewardship and responsible investment. She is an experienced advisor and a former Managing Director, and head of investment stewardship, at Blackrock. She has also been named one of Australia’s top 10 Women of Influence in Corporate Governance, is a director of the UN Global Compact Network in Australia and received the Asia Leadership Award from 100 Women in Finance.
How did your interest in ESG develop?
I describe my career as being quite serendipitous - I am an accountant by training and I ended up as Investor Relations Manager at Qantas in the early 1990s pre the float, and then left after the float. I then went to a proxy advisory firm and I didn’t really know what they did, but they had written reports on Qantas which I had found very interesting. That gave me a focus on the “G”. My role was to research listed companies on their governance practices and advise institutional investors how to vote their proxies at shareholder meetings and how engage with listed companies on governance.
I saw governance as a very important topic, and I’ve never really understood why it's taken so long for investors to focus on governance. The thesis is quite simple - boards provide oversight of the management to reduce agency costs, therefore a board needs to comprise competent directors, a majority of whom are independent and have the necessary skills and expertise to provide oversight of management on behalf public shareholders. To me, it wasn’t rocket science, and it was such a value-adding thesis to value creation of companies.
In the early 2000s, I did notice an increased focus on what was called socially responsible investment (SRI), and that’s where investors were talking about having negative screens on portfolios for issues such as tobacco, and positive screens to include companies that they thought were making a positive contribution to society.
And it wasn't until the mid-2000s the term ESG really developed, and I thought at the time when I first saw it - why is the “G” at the end? Because a competent board will really understand what a company is exposed to from an E and S perspective, and ensure that those risks are better managed. But the term came as it did, ESG. It has also sort of moved on to a broader topic of sustainability, and I really look at sustainability as how a company makes money, and its footprint on society and not about what money it makes. So, to come back to your question, on how did I get into ESG, it really was an evolution for me, it was not a conscious thing in the late 1990s to get into this industry.
You talked about “G” sort of underpinning ESG. When we talk about the governance aspect of ESG, what exactly are we talking about?
Well, we're talking about the board and the board are there to reduce the agency costs of companies, and again it's around having the appropriate skills and expertise. I was fortunate enough for a period of 10 years to analyse the ASX companies on “G”.
What we looked at was independence on the board, to ensure that there were independent directors to provide that oversight; that there were directors with core industry skills, that when you looked at the independent element of the board, they weren't all ex-CEOs, they weren't all lawyers, or they weren't all accountants, that there was a diversity of skills.
That data that we collected and the ratings that we assessed was then independently assessed by a quaint team, and it showed outperformance for those companies that had strong “G”. Now, while “G” is important, I've always been a bit sceptical about saying that good “G” equals good returns, because I've seen many poorly governed companies, and I think some big tech companies would fall into that category, that have performed extremely well. But I haven't seen a company that's performed very badly, and when I looked at the “G”, and I say “that it's got good ‘G’”. So that association with poor performance and poor “G” I think is very strong, not as strong as good “G” and good out performance.
As you’ve explained you've been on this journey as ESG has developed it seems to be thrust into the spotlight over the last 12 to 18 months. Why do you think that is? How much of that is a confluence with some of these deep underlying trends? And how much is because of COVID and the way things have changed as a result of that?
I think there are a number of factors. A key factor is that we have finite resources, and at the moment, the world is going through its resources at a great depletion rate, and not replenishing these resources. And so that led in 2015, to the development of the sustainable development goals by the UN, and this is to ensure that both the world's resources and inequalities are addressed by 2030 So that’s a 15-year horizon. So the sustainable development goals have brought a different focus and while these goals are for companies to sign up to, they certainly have implications for listed companies. And I think a second factor that relates to COVID that really did highlight inequality that exists. And again, this is linked back to the SDGs. Another factor is the amount of money that's invested in public markets that comes from leading pension funds and this has increased significantly over the last couple of decades. More and more people understand that their retirement funds have exposure to these public markets, and this is what I believe has contributed to the focus on how companies make their returns, so sustainability. In turn, these asset owners or the public pension funds have been increasingly putting pressure on their asset managers: the Blackrocks, the State Streets, the Vanguards, the Fidelitys, to demonstrate that they are also acting as good stewards on behalf of their assets. It's the pressure of investors and other stakeholders, and the management of climate change risk has also increased significantly over the last four years. And again, countries, corporates, many stakeholders are saying climate change risk is a real risk to our society, and that it takes a number of players to contribute to help resolve this problem as quickly as we can.
What role can communications and communicators play in addressing ESG in their own company? How do they help shape the discussion at the top of their organisations?
I think communications is critical. One of the first steps is that a company really has to establish good governance practices and frameworks and ESG or sustainability needs to be absolutely embedded into strategy. It's not a PR issue, and it's very obvious particularly to investors when ESG and sustainability issues are treated as PR. This is about leadership and positioning the leadership through sound communications, and it's absolutely critical.
I'm referring to communication, both internally and externally, and good communication also involves understanding who the key stakeholders are, and where necessary the communication needs to be tweaked to suit certain stakeholders. So, understanding the stakeholders and stakeholders are changing all the time.
If I look at climate change reports, which are going to become of increasing importance over the next couple of years, being able to communicate climate change or how climate change is managed by a company in terms of its governance, in terms of risk management, strategy, and data and targets - that will allow companies to get support from their shareholders and other stakeholders. Those companies that fail to do so will then be targeted by social activists, and that's what I have seen increase over the last five years - increases in social activism, among the asset owners, community and the number of shareholder proposals in the US and Europe around climate change, and around other ESG issues. I think poor communications is a key issue of why these companies get attacked by such activists.
How do you put a value on ESG? How closely is ESG linked with reputation, trust, brand and licence to operate?
The value of ESG or sustainability is significant for any listed company. And there's very good research being undertaken by a firm called Oceantomo. They have been looking at the S&P 500 Since 1975. And in 1975, their research showed that 75 per cent of the market cap of an S&P 500 company was represented by tangible assets, and 25 per cent by intangible assets. By 2020, that had changed to 10 per cent being tangible assets (property and financial assets etc.), and 90 per cent being intangible. That’s social capital, environmental capital, and innovative capital. That's where the value of the companies lie - in intangible assets, and that's what ESG is. It's around managing and the board taking a value creation approach to this intangible elements of a company, so it is absolutely significant. Poor management of ESG can lead to the loss of a company's social licence to operate, and can be value destroying in terms of brand and reputation.
How does APAC compare with other regions when it comes to ESG?
APAC ex-Australia I think is behind other jurisdictions, particularly Europe, many sustainability reports that I've reviewed are compliance driven, and this is not a compliance issue. In my engagements with boards in APAC around ESG, I would more often than not be told “Oh, that’s a compliance issue, it’s in our compliance department” or “Our CSR report / sustainability report complies with SGX reporting requirements for compliance or complies with HKX reporting requirements”. The focus was just ticking the box of whatever the requirements were for the particular listing authority, and it's missing the opportunity to demonstrate leadership, and a company's ability to generate longer term returns and manage reputation issues.
For companies that do it well and can demonstrate that ESG is integrated into long term strategy, I believe it's a pricing issue and it just goes back to what I was saying before about the percentage of value of the market cap which is related to intangible assets. It's key. It's about value creation. In addition to risk management
Let’s talk about your career for a moment. You started out as an accountant, you weren’t in comms, but you were in investor relations at Qantas. How did that experience at Qantas influence your career and your approach?
One thing that I do recall about the aviation industry, an industry I loved - because before joining Qantas, I had thought of becoming a pilot. Because of the discrimination against women being pilots, Qantas at that stage had no women pilots, I thought I was better working in sort of different role.
But it is a very complex industry, and it has many external influences. And so, that made the comms and engagement with the institutional investors a real challenge. It was always trying to keep on top of what was happening to be able to undertake that role.
The other aspect is building strong relationships with our institutional investors. And when I was an IR Manager back in the early 1990s it was a very new industry. The Australian Investor Relations Association had its first meeting, and there were only six IR Managers of the whole of the ASX, so it was quite an interesting time to be there.
I think the other thing that has really changed for IR managers in the last couple of years, is that they need to be having that discussion around ESG. I had a meeting only three weeks ago with the Chair of one of Australia's largest companies, and he said for the first time at the half year results around 30 per cent of the questions were focused on ESG. And whereas, the results meeting would normally have been focused on - market share, margins and ESG has never come up - that was one of the key feedbacks I used to get from boards - that no analysts ask about these question, that has changed. And so for IR managers, they really need to step up their game to make sure that they're across the ESG issues that are applied to their company
What’s your advice to communicators at the start of their career, who are interested in becoming more active and finding out more about ESG?
Read, read, do more reading and observe. There are so many good ESG publications out there that are free on the web and there are others that you do need to pay for. There are many webinars and one of the things that COVID has changed is increasing the amount of webinars, and it's much easier to participate and watch conferences and recordings.
But there are many things out there to be able to bring yourself up to speed to understand what the issues are, what are some of the issues over the horizon. And I was at the UN Global Compact Network Conference in Australia in the last couple of days, circular economy is an issue that that kept coming up. Climate change is also one of the key issues, and that will stay for a long, long time. But other issues, in particular circular economy and supply chain management, is a big issue, particularly around cotton in Xinjiang in China.
Understanding what the issues are today but also keep your eye out looking forward. What’s likely to be the next issue? Is this part of your company strategy? Start thinking about raising these issues with the senior management team.
When you’re not advising boards on critical issues, what do you do in your free time?
I’m a very keen sailor. I live on the northern beaches in Sydney near Pittwater. We have share in a yacht, which is not very far from us, which my husband and I enjoy sailing. I also sail a Laser Radial in Masters fleets. Every time I go out - in fact I’ll go out to sea on Sunday - I get hit in the head with a boom and capsize, every time I asked myself why I do this, I still don't have an answer, but I'm going back out again on Sunday.
Anything you’re reading or watching at the moment that you’d like to share?
My favourite podcast is called Trace. It’s on ABC Listen by Rachel Brown, and she's an unbelievable investigative journalist into various crimes, and it's just gripping. Once I start listening to one of her new episodes I keep going.