Governance Bites #115: environmental, social and governance in investing, with Katie Beith

In this engaging interview, Mark Banicevich sits down with Katie Beith to unpack the fast-evolving world of ESG—environmental, social, and governance. From how analysts measure ESG quality to the governance weaknesses that undermine credibility, Katie explains how ESG factors shape investment decisions and influence company performance. The conversation tackles whether ESG means trading returns for values, the role of governance in ensuring commitments are real, and what boards must do now to prepare for rising scrutiny. With a look ahead to the future of ESG investing, this discussion is packed with insights for directors, investors, and governance professionals.
Katie Beith serves as the Head of Environment, Social and Governance (ESG) at Forsyth Barr, having joined in November 2021. In this role, she is responsible for integrating ESG principles across the firm's operations and investment processes, also supporting advisers with client-specific needs. Katie brings nearly 20 years of experience in responsible investment in the UK, Australia and New Zealand. Katie’s past roles include for the Responsible Investment Association Australasia, UN Principles for Responsible Investment, and the New Zealand Super Fund. Katie is a member of New Zealand’s Stewardship Code Governing Committee, a member of the External Reporting Board Advisory Panel, and a former board member of the Impact Investing Network.
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Transcript

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Okay, today we're going to be talking about ESG, which stands for environmental, social, and governance in investing. I'm Katie Beith. I'm the head of ESG at Forsyth Barr. I'm delighted to be here with you today, Mark. Just a very quick introduction to myself: I've been with Forsyth Barr for four years, before that with New Zealand Super Fund, and before that, overseas. And majority of my career has been in the ESG space, so it doesn't feel new to me; it's just a part of my job and always has been. I got into this space because I, while I was traveling and in my 20s and doing my OE [overseas experience], I got really... I sort of was really affected by the state of the environment in Europe that I was seeing and the degradation of the environment pretty much. And I was working for an asset manager in London, and I was really connecting the dots between how corporates, the role of corporates, and how they can be part of the problem, but also how they can be part of this solution, and the role of shareholders in driving the discussion around environmental and social issues with companies, and that was where my interest sort of landed, and I've built my career in that space ever since. Hi, I'm Mark Banicevich. Welcome to Governance Bites. And as you just heard, today I have the absolute pleasure of spending time with Katie Beith. Katie, thank you very much for your time. As you said, you've got a very strong background in environmental, social, and governance, or sustainable investing more broadly, right. So, you know, you've got had time with the PRI, the... Can you remind me what that stands for? It's the Principles for Responsible Investment. Based in Europe. You've also spent time with the Responsible Investment Association of Australasia. So, been in this area for quite some time. Yes. And why I thought it would be really valuable to have a conversation is with companies like Forsyth Barr investing in corporates, in companies, and looking at these ESG factors, it would be important for boards to know a bit about what this is. So, can I start then by asking you to introduce ESG? What is environmental, social, and governance? What are we talking about? Oh, well there's sort of two sides to this conversation. There's ESG from the corporate perspective, or the firm perspective, and that is really about the policies and practices that companies have in place to help them to operate more sustainably, look after their staff, and really start to drive, you know, better outcomes for the environment and society. So, that's on the firm side. Then on the investor side, you've got the lens that we're looking through as to how can a company's or a corporate's ESG practices help give us insights into how they might perform over the long term, or whether they're a good investment over the long term. They're very interlinked, but we're often talking about two different perspectives. So, hopefully as we come through the conversation today, we can clarify when we're talking about companies and when we're talking about investors. Okay. Thank you. Well, let's take that investment lens a little bit. How do your investment analysts measure the quality of a company's ESG practices? Yes, it's really hard, and it's very much an evolving area. I think the way that we look at ESG is, particularly, we're really focused on New Zealand companies, more so internationally. That's what we know in our backyard. The policies and practices that a company does to start operating more sustainably is a relatively new area for a lot of companies. So there's been a big focus over the last few years, a drive for better data to help investors understand how well companies are doing on this journey. So I think right now, we're still building data to help assess that. So the way we look at it really now is a proxy for how a company might be transitioning to position themselves for a more sustainability focused future. So I think there's a few things in that. It's unpacking really that that's the direction of the world. And it's assuming that companies buy into that and are positioning themselves for that. Now, you know, I can't say that everybody I come across, you know, believes in that philosophy, but in terms of what the data and statistics are telling me, there's definitely a move, you know, a need to move, and change the way you operate, with a greater focus on operating more sustainably. So from an investor lens, we're looking at how companies are positioning themselves for that future. Does it give them a competitive advantage? Does it support their reputation? Are they doing things meaningfully, authentically, robustly, credibly? And how is this going to help benefit over the long term? Is it through customer relationships and changing consumer demands, meeting regulations? All of these things, how they kind of come together and help a company better position itself for the future. Okay. How much of this is publicly available data and how much of this is that data that you have access to because you're Forsyth Barr and you can sit down with boards and companies and so forth, and ask questions. All of it is publicly available. So we only work with publicly available information, but we have seen a huge improvement in what is available for us to assess, you know, over the years, and we've just been really looking at this deeply for about four years now, just Forsyth Barr, and that's been a sort of big focus for us over the last four years. And even in that time, we see a huge progress in the number of companies, for example, reporting greenhouse gas emissions, getting those verified, and reporting different sort of data sets that we're looking for. So it'll be a mix, I take it, of quantitative data such as you just suggesting but also a lot of qualitative data about looking at press releases and news reports about what the company's doing? Yes. That's right. And I, you know, everything in the space needs some context around it because the numbers on their own, particularly when you don't have a large swathe of history behind it, give mixed messages. So that accompanying text that comes with those numbers is really important, and obviously you need that in the qualitative assessment of how companies are progressing, too. Right. Thank you. How is good governance measured in these frameworks? Yeah. So, I guess for so, governance is the way a system is operated and controlled, and it's about the relationship between shareholders, management, boards of directors, and other stakeholders, as well. There's a lot of prescribed best practice that sits underneath to help understand those relationships and ensure that the good practices are in place. They're well defined and well understood, and there's plenty of both regulation of codes of conduct. So it's actually, prescribed good practice is well understood and well known in the market, particularly to large listed companies and their boards. And then, how do you use these ESG metrics as part of your investment decisions? How do they influence, for example, your buy, sell, and hold recommendations to clients? Yes. And it's a hard one to answer because I think it's still... we're still at such an early stage of understanding how sustainability is winding out and affecting companies that there's not necessarily... there's definitely not a direct relationship between, at the moment from what we're seeing, between a company's ESG practices and policies and their share price performance. However, what we do see, you know, is as some of the things I talked about before, how sometimes we can look at it as a proxy for quality of management. Sometimes we can, if we see gaps in data, we might think that that's an area that needs further investigation. Sometimes there's elements of risk in there that we might want to know more about. It sits alongside our fundamental analysis because right now it's really hard to draw very clear interlinkage relationships between them. But it's clear in, you know, the efficiencies in company operations. It's clear in management and brand reputation, you know. It's clear in evolving to changing consumer and customer demand. Like, those sort of things are really clear, but just in terms of how they actually play out and how you fundamentally value a company or how its share price might improve over the long term due to these operations, that's still a very difficult area to find some relationships. So is it fair to say that you're not plugging ESG metrics into a calculator and saying, hey look, computer says hold? You, it's more qualitative than that. It sits alongside our fundamental analysis and just gives us that extra lens of how well a company is positioning itself for the long term in an operating environment that could well be very different to how you find it today. Right. How do you then, you mentioned that there's no clear evidence yet one way or the other about whether ESG metrics fundamentally improve share price as one factor. So how do you respond to critics who'd say that, you know, "Well you're just substituting investment returns for values, for"ethical values?" In that question, I think, you know, you need this sort of long-term lens because we have these big factors at play that are rolling out across the world, whether it's a, you know, decline in water quality, whether it's the change in climate, whether it's soil degradation, whether you there's all sorts of, you know, whether it's the inequalities you're seeing in society. There are a lot of these long-term trends and themes that are playing out. And it's not always easy to see, you know, in a company's quarterly report or its annual report or its quarterly results, how these things are unwinding. And so I think it's important that you take a long-term view of these things, and you know it's really a lens as to how well a company is managing all these different issues that they need to. I mean, how their strategy and their operations might be evolving to meet changing demands or changing operations, and that's the sort of lens we're looking at and keeping an eye on. It's an interesting one to consider. I remember a number of years ago now, Adrian Orr, who was the Governor of Reserve Bank [of New Zealand] at the time, presenting at the FSC [Financial Services Council] conference very much around long-term versus short-term thinking, and how we quite often compensate or remunerate senior managers based on short-term performance, where we really need to take a much longer view, and it's really interesting to see a lot more Te Ao Māori [Māori world view] coming out in governance, and being considered because they have very much a long-term view, right. Yes. The company that I work for is now owned by a Japanese parent. And again, very much, you know, 30-year plans at a minimum, which is quite a change in mindset for a board of directors in our part of the world. So it's really interesting to see it. What role should governance play in ensuring that those ESG commitments are (1) credible and(2) measurable? I think there's another element in that as well, and that is, you know, driving the right outcomes. So I think that, you know, boards have a really important role here. I think they, you know, from one, giving the signals that this is important to them and to their to the organisation. So if they're not seeing data, asking for it. Then secondly, the data they are receiving, how robust is it? How comfortable are they that it's telling the right story? That it is being collected in a wholesome, robust, standardised, repeatable way that's giving them, you know, good insights and the right insights to what they're actually, you know, trying to measure. And then I think there's another element in there for boards in that, you know, I think with the sustainability agenda a lot of the low hanging fruit's been achieved. So, light bulbs are all LEDs now. You know, electric cars are kind of part and parcel of life in a lot of situations, not all, but a lot. You know, the sort of easy wins. You know, recycling's in place in most head offices. You know, water use is monitored and is measured and there's ways to control it. There's a lot of like really, you know, the easy kind of low hanging fruit has been done, but I think, you know, to really move to truly operate sustainably, we need some big projects now. And they're actually costly and they may be, if you are looking at traditional return on invested capital metrics or short-term financial goals, they might not - They'll be long paybacks. - They'll be long paybacks. And so, I think the board has a really important role in helping management and others to see the long-term benefits of what they're doing and measure it. If they can't measure it in short-term return on invested capital, then what are other ways that they can measure the positive benefit? Can you give some examples of those sorts of projects? Yeah. I mean I mean, say, I mean I just think of Fonterra and what it's doing now to change, you know, it's coal-fired boilers over and the additional cost that that takes. And so I'd love to have been around the boardroom table as to, you know, how they got those discussions over the board. I mean, I guess for Fonterra, they're lucky, in that they have large global customers that are really demanding that they operate sustainably and reduce their emissions and things like that. If you don't have that big bold, those big bold customer asks like those sorts of big transitional projects that might be needed, say, you know, even if it's buying a round of electric trucks or something, you know, you can do it but it's just unaffordable at the moment. Or changing out, you know, old systems for new ones or removing an emphasis. I think that whole situation with balance and the focus on gas and that came out last week in the news and how it's having to stop operating. But how do you switch off such a reliance on a single fossil fuel to make your business successful? It's expensive. So how do boards challenge management to look longterm and drive those changes when they are expensive and it's not easy to see, you know, a way out. And may potentially have short-term negative impacts on cash flow and profits and justifying it to shareholders and so forth. That's exactly right. The many demands that they're having to manage, as well as, you know, keep the company profitable. Yeah. Right. What's the most common governance weakness you see that undermines this ESG credibility? Do you know, I mean, in New Zealand companies are generally, and I'm speaking very generally. but are generally well governed. And we have good rule of law. We are, you know, a first world country. We have like good frameworks to support well-governed companies. And generally, on metrics that measure corporate governance practices, companies in New Zealand often look pretty good. And what, I did a piece of research recently that looked at why some prominent New Zealand companies have really underperformed and had terrible share price performance over the last three to five years or longer, yet on the surface their corporate governance metrics look pretty good. And it's brought up, you know, a whole raft of issues for us to consider and look at. I don't think that there's, you know, any one issue, but I think, you know, what we need to move away from is being able to tick the box that we have all these good corporate governance practices in place and really being able to understand, you know, a company's strategy, where it's going in the long term, how it's being delivered, and how all these mechanics in place that are helping it to get there are providing the right sort of transparency and a good analogy of progress, supporting good decisions, supporting the boards to have good relationships with management and lead them through the difficulties and manage their risks and things like that. So I generally see it, it's a longwinded answer, sorry, as a move, I guess, you know, away from just having good practices in place, towards how they're really helping the boards to, you know, ensure that the companies are meeting their long-term strategic plans and balancing and managing the risks that the board sees them coming. So, possibly, to summarise in a key way to say moving away from the box ticking and into understanding why you're doing this, and really doing this for the right reasons. It's that integration between the what makes good corporate governance and the real operations of a business, bringing it together to get a more holistic look at really what's going on in a company. Yes. Right. We're seeing a greater groundswell and awareness of not necessarily the term ESG but certainly this ethical investing desire. What should boards be doing now to prepare for this additional scrutiny? Well, there's groundswell and awareness, and then there's also a bit of skepticism and push back as well. Yes. I think, you know, the main thing that boards need to be able to do is know the why. Know the why they are doing this and really to focus in on what is core and material to them. You know, each sort of industry, each sector has different types of ESG issues, some more important than others. And being able to really articulate what those key measures are, why you need to be managing them, what your vision is for the future. And having a credible pathway with robust information behind you. I think that's the evolution that we're seeing right now, and being able to really tell that story of why and what, you know, why your business needs to transition, if that's the word you want to use. And what, you know, what they're doing to get there. Okay, great. Where do you see in ESG investing heading and what should boards be doing now to prepare for that direction? There's definitely, I call it ESG 2.2. It's being revamped and it's coming out the other side. For me that means a lot more commonality and understanding of what the term means, and it also moves away from marketing materials and into the operations of a company and firmly sort of integrated into a business model, a strategy and an operations with clear articulation of why, and data to back that up. So it's going from being something that's quite general to being something that's very precise. It's going from something that's been aspirational in the past, to have more of a practical lens, but without losing, you know, those goals that this is hard to do and we do need to be aspirational, too, to sort of push ourselves. So it's a very interesting time. I think the scrutiny that we've had on the term ESG has been a good thing because there certainly have been a few bad actors that have jumped on board and marketed themselves and not necessarily changed behaviour. The greenwashing. Yeah. So, you know, coming out the other side, I think the scrutiny has been a good thing and we need to come out the other side with credibility and robust practices in place. Okay. Thank you. One final question for you, and taking a bit of a broader view around governance generally. In your career, what's the best governance advice you've heard? Whether you've received it or overheard it or... What I come back to, and if I think about the roller coaster in a way, the ups and downs of everything that's happened and the politicised nature of this debate right now, I think what we just have to come back to is data and what the data is telling us. And, you know, I sort of alluded to it before, but, you know, there's a lot of clarity, a lot of data around soil degradation and the changing climate and poor water quality and those rivers that we used to be able to swim in as kids and we can't anymore. The aging infrastructure that just, you know, can't cope with things these days. I think, you know, if the goal, which I think the goal is, is for businesses to be able to operate in a sustainable way at some point in the future and we need to evolve to get there, then we just have to come back to that data to stay true to the reasons as to why, you know, why things need to change. So, as a director, demand or ask for the data you need to make good decisions. Yes, yeah. Make sure it's there. Great. Katie, thank you very much for your time. Thanks, Mark. Really appreciated it. For those, if you're based overseas, not all of our rivers are nasty, and, you know, we're still one of the nicer places in the world. So, do come and visit. But I look forward to seeing you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favorite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back and please like, subscribe, and share the videos and podcasts.