We often get asked by investors some common questions about the companies we invest in: do these companies care at all about Environmental, Social & Governance (ESG) risks and ethical investing? If they did care, what impact can Morphic have? Has any company made any changes based on what you thought? Do they listen to investors’ feedback?
These are valid and understandable concerns investors have, as there is a sense of frustration in the community with a perception that companies are reluctant to act on issues ranging from climate change to corporate governance best practice and they sometimes seem more focussed on hiring Public Relations staff than actually changing their behaviour.
Sims Metal Management (ASX: SGM) is probably one of the most important companies you have never heard of. They are one of the largest recyclers in the world and recycle around 10 million tons per annum of metal scrap; metal that would have otherwise gone to landfill. If you live in New York, the garbage that you put into your rubbish bin is collected by Sims, sorted and recycled. Sims Metal Management plays an intrinsic role in the circular economy by making resources available for future use – in fact, Sims Metal Management is the world leader in metal and electronics recycling.
MSCI and the Australian Financial Review have noted before that Sims was “best practice” in the ASX 200 for carbon risk disclosure. When the company asked our input into improving this further, we were very happy to actively engage with Sims Metal Management; share some of our insights as ESG investors; and contribute to their Sustainability report. We thought it may be useful to get Angela Catt, Investor Relations Director from Sims Metal Management, to explain further how Morphic had an impact and describes the way Sims thinks about ESG.
Sims Metal Management is a key part in solving the world resources and pollution problem by being able to recycle over 10 million tons of material and actually prevent it from going to the tip by reusing it. That is a key part of the circular economy.
Our Board, Chairman, and CEO are genuinely interested in these environmental issues. Our Chairman is a member of the Wentworth Group of Concerned Scientists and I have seen him first-hand working with our shareholders to understand their ESG concerns, and really bring that back to the Boardroom. Our CEO is the founding sponsor of World Recycling Day which is an initiative that recognises the importance of recycling and its impact on preserving our resources and the future of our planet.
I met Chad in the lift, and we started having a chat about ESG. I told him I was from Sims Metal Management and when I heard he was from Morphic, I was really excited, because I wanted to sit down and have a good conversation with an ESG investor. Fortunately, Chad made time and we had a good chat. Morphic and Chad gave us great insights in terms of what we can do to improve our communication and our ESG impact as well as giving us insights as to what ESG investors are genuinely interested in.
This impacted a lot of things for us. In particular, you will notice that our 2018 Sustainability Report is of much higher quality because we incorporated those recommendations from Morphic and Chad. I knew we had things we could do to improve but I didn’t know where to start, and I needed to find the right person to tell me. That chat with Chad was a moment of trust where I could really have confidence in his view and could understand he had that depth of expertise.
When I took these findings back, our Executive Team, our Chief Risk Officer, CEO, and CFO were 100% supportive and really happy to implement these changes.
We are working on a few things around ESG. Our 2018 Sustainability Report presents now a solid framework which we have structured around the Task Force on Climate-Related Financial Disclosures (TCFD) in governance, strategy, risk management and metrics, a clear way to lay it out. We also started to report on the UN Sustainable Development Goals which has been helpful in terms of driving our strategy and our activities going forward.
I would definitely encourage more companies and corporates to engage with investors and ESG investors in particular because they have genuine insights that can really help you focus on what is important to have a genuine impact on the community, and then be able to communicate that.
Liking a company is one thing, but being able to make money from that investment is another question. Morphic’s investment process requires the team to justify the price for the company is going to invest in. Unfortunately, all through 2018, the team was unable to make the valuation work on Sims Metal despite looking at it up to four times last year. 2019, on the other hand, could be completely different. In fact, we are actively looking at the stock now, and who knows? It might be in the Morphic portfolio in the coming months.
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