Måns Carlsson, Head of ESG at Ausbil Investment Management, discusses his recent visit to Bangladesh and changes made since the Rana Plaza building collapse in 2013.
Peter Milios: Today we’re talking to Måns Carlsson from Ausbil Investment Management, an Australian investment manager with over $15bn in assets under management. Ausbil has a three-person team dedicated to ESG research. Måns, welcome back to the network.
Måns, you recently returned from a research trip to Bangladesh, but before we get into that, can you tell us how ESG considerations are a part of Ausbil’s investment process?
Måns Carlsson: Yeah, sure. I think Ausbil has a fairly unique approach on ESG in the way that we have a team of dedicated ESG specialists sitting within the investment team producing proprietary ESG research on ASX-listed companies. And that research is then used by the financial analyst, when they set their investment recommendations. And we also participate in all the investment team meetings and all company meetings. And ESG integration can mean different things to different people, of course. To Ausbil, it means two things. First, better-informed investment decisions and second active ownership. So, with better-informed investment decisions in a world where ESG factors are becoming more and more important, there’s hidden risks and opportunities that we can unearth and then provide that to the analyst, and we’ll take it into consideration in our investment approach. And, on ESG engagements, well, again, when ESG factors are becoming more and more important, we think, as an active manager with good corporate access, we have a vested interest and engage with companies on ESG issues because we think, over time, companies with strong ESG profiles should trade at a premium to the markets. So, all up, I think we have a unique approach and it’s built on proprietary ESG research because I think that’s the way we can tailor it to our investment philosophy, which is that earnings revisions drive share prices, and we also have a preference for companies with sustainable earnings and also companies with good quality management. Because I think that’s really key when you integrate ESG, it has to be aligned with your investment philosophy.
Peter Milios: Now, turning to your recent trip, why did you visit Bangladesh in particular?
Måns Carlsson: Well, in general, we think ESG field trips is a great way for us to gain insights. And I was in Bangladesh in 2014, and I haven’t been there for nine years, but this year marks the 10th anniversary of the Rana Plaza Building collapse, which is where 1,130 people died in a factory collapse. So, I want to go back and see what’s changed and what hasn’t changed and what can we learn from that in terms of investments insights, and use that in our research and engagements going forward.
Peter Milios: Can you give us some more detail about what happened and what’s been done since to ensure that history doesn’t repeat itself?
Måns Carlsson: Yes. So, in April 2013, workers went in to work in a multi-storey building. On the top floor, there were five garment factories, and the workers found cracks in the walls of the building the day before, but they were dismissed and told to go back to work. Now, they went up to the factories, which is heavy with machinery, and the weight of those machines and the factories in general just made that building collapse. So, 1,130 people died and 2,500 people got injured. So, it’s the biggest tragedy in Bangladesh’s history, and it caused an outcry in the fashion industry, but also in the investment industry. Now, we and other investors played a role in the aftermath of that where we encouraged companies to sign up to something called the Bangladesh Accord. The Bangladesh Accord was a multi-stakeholder agreement trying to eradicate this risk from ever happening again. Now, I think if I look at Bangladesh now, where it is, I think that risk of another factory collapse or factory fire in a first-tier garment factory is probably lower than it used to be. Well, it is lower than it used to be. But the risk is not gone completely. What I’m more concerned about is more that the underlying issues that I found in 2014 are still there. So, in many ways, I think companies sourcing from Bangladesh can sometimes take on a false economy.
Peter Milios: Now looking at the Australian landscape, are there any Australian sectors that are dependent on Bangladesh for sourcing? And, if so, what are the risks associated with that?
Måns Carlsson: Yeah, so mainly the retail industry and fashion in particular. So, garments account for about 85 per cent of Bangladesh’s exports. There’s a major industry there. And Australian companies have traditionally been quite China-centric, and they still are. But more and more we see companies move away from China to diversify risk, and they go into Bangladesh because there’s lower wages there. So, there’s a wage arbitrage. But the risks associated with that is that the wages in Bangladesh are so low, there’s a far cry from a living wage. A living wage is a wage that covers your basic needs, essentially. And when workers are not paying a living wage, well, there’s a risk of social unrest. There’s also reputational risk for the company sourcing from there. Another key issue, which comes back to Rana Plaza too, is that all the factory disasters we’ve seen in Bangladesh — and Rana Plaza was not the only one — have occurred in factories without union representation. Now, union representation remains very low in Bangladesh. About 5 per cent of the factories in Bangladesh have union representation. So, we think there’s a lot of risks that companies take on. So, in order to be able to operate there, you have to have a very strong responsible sourcing framework in place.
Peter Milios: What were the key learnings of your trip and were there any surprises?
Måns Carlsson: I think the key learning for me was that the risk of another Rana Plaza happening again is lower. It’s not gone, it’s not eradicated, that risk, but certainly lower in a tier-one factory level. But, sadly, many of the underlying issues are still there, which means the risks that I saw in 2014 haven’t really gone away. And I think the role we investors should play there is to engage on what is best practice. I think, for any ESG issue, whether it’s human rights or climate change, whatever it is, our approach is to find out what is global best practice. And then we encourage ASX-listed companies to adopt that. And I think, in responsible sourcing, we can look at what some international retailers are doing, and we’ll encourage Australian companies to do that as well to avoid some of that reputational risk. And it’s not just about reputation too, it’s also about earning sustainability at the end of the day.
Peter Milios: Okay. Now, just a general question to finish up. What are the trends, what other ESG trends have you seen over the past 12 months? And what ESG trends do you expect to dominate the rest of the year?
Måns Carlsson: Yeah, so I’ve been in ESG research for 16 years, and I must say the last two or three years have probably been busier than all the years prior. And I think that trend’s going to continue. ESG factors are becoming more and more important. There’s more regulation coming in. So, I think there’ll be a continuation of the things we saw last year. Climate change, of course, is the number one topic. We have the safeguard mechanism under reform this year, and there’s going to be some changes made to that. And, from an investor perspective, we need to understand how companies are going to meet their climate change commitments, because companies have made decarbonisation commitments, but ultimately it’s up to investors to assess the credibility of those. Second topic is modern slavery and human rights. We talked about Rana Plaza before, but it’s also Modern Slavery Act in Australia. That’s under review and there’s going to be some changes made to that. There can be additional regulation there too. At Ausbil, we’ve played a key role in the investor universe In that field. We were the investor voice on a panel of experts advising the Federal Government, and also help them write a guidance on the Modern Slavery Act. But given that there’s more and more regulation overseas as well, we think that that’s going to be a strong theme. Other themes which will be important this year, I guess cybersecurity, given what happened to a number of companies last year, and also biodiversity. So, I think all up you can say that 2023 will be another very busy year for ESG.
Peter Milios: Måns Carlsson, thank you for your time.
Måns Carlsson: Thank you.
Ends
