Will Baylis

Corporate Australia is struggling to meet Net Zero goals, with significant challenges hindering progress according to Martin Currie Australia, a leading equities investment manager. Even though the firm has committed to aligning its Sustainable Equity and Sustainable Income Funds with the Net Zero Asset Managers Initiative (NZAMI) goal of 100% verified Science-Based Targets (SBTs) by 2040, the journey is proving far more complex than anticipated.

“Achieving Net Zero is not a straightforward path,” says Will Baylis, Portfolio Manager at Martin Currie. “It’s a multi-dimensional challenge with stringent requirements, technological hurdles and competing corporate priorities slowing progress. Many companies are finding it difficult to balance regulatory compliance with meaningful climate action.”

Since the firm began tracking SBTs in 2022, only 11% of S&P/ASX 200 companies by market capitalisation have achieved fully verified SBTs, and a further 15% are publicly committed to doing so. Alarmingly, 73% of the index remains without clear commitments to verified climate action, signaling a significant gap in corporate Australia’s Net Zero ambitions.

On a sector-by-sector basis, companies in the real estate, consumer staples, communications and industrials sectors have progressed the most with verification, while healthcare companies are largely committed to the process. Unsurprisingly, utilities, metals & mining and energy are the laggards.

Martin Currie Australia’s recent outreach to large ASX-listed companies revealed a troubling trend: rather than embracing science-based frameworks, many companies are scaling back or delaying commitments. “The reasons are multi-faceted, but the end result is clear — we’re not moving fast enough,” Baylis says.

Martin Currie Australia’s research uncovered several critical obstacles impeding corporate Australia’s climate journey:

1. Regulatory burdens: Australia’s new Sustainability Reporting Standards, overseen by ASIC, require large businesses to disclose climate-related information. While these rules are a positive step for transparency, they do not mandate external verification like SBTi. As a result, many companies are prioritising compliance over proactive climate action.
2. Stringent SBTi requirements: SBTi’s alignment with a 1.5-degree pathway demands rigorous measurement of Scope 3 emissions and ongoing recalibration of targets — a hurdle many firms are ill-equipped to handle. Hard-to-abate sectors like resources and energy face even greater difficulty due to technological limitations, particularly the slow progress in green hydrogen and renewable energy access.
3. Sector-specific challenges: Australia’s resource-heavy economy presents unique challenges. Many companies in non-resource sectors question the necessity of SBTi validation when larger emitters in mining and energy lag far behind. In the resources sector, Fortescue is one of the few major players to achieve SBTi verification.
4. Alternatives diluting focus: Companies are turning to alternative frameworks, such as the Australian government’s Climate Active Carbon Neutral Certification, which emphasises transparency but lacks the science-based rigor of SBTi. In industries like property, NABERS Energy ratings and GRESB scores provide sector-specific benchmarks but don’t fully align with global climate science standards.

“Our findings also highlight emerging trends that could further derail climate progress. Companies are resisting the ‘all-or-nothing’ 1.5-degree pathway, arguing that a below 2-degree scenario might be more realistic and encourage wider adoption. There are growing community objections to renewable energy projects, such as wind farms, which are slowing infrastructure development critical for emissions reductions. And rising scepticism towards ESG topics and protectionist policies are diverting corporate priorities, further complicating the transition to Net Zero.”

Despite these challenges, Martin Currie remains committed to its goal of verified SBTs for 100% of its portfolio holdings by 2040. However, the firm acknowledges the need for flexibility and a non-linear trajectory.

“Our ambition is clear, but we must balance it with adaptability,” says Baylis. “A rigid pursuit of perfection may alienate companies instead of driving progress. By fostering engagement and dialogue, and supporting realistic transitions we can encourage broader industry participation and meaningful climate action.”

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Martin Currie Australia is the active equity specialist investment manager of Franklin Templeton Australia Limited (Franklin Templeton).

The Martin Currie Ethical Income Fund is a long-only Australian equity Fund that uses a responsible investment approach by screening companies based on ethical criteria focused on identifying companies that offer compelling income characteristics. The Fund is designed to target a high, stable and growing income stream, while incorporating ethical criteria.

Will Baylis, Portfolio Manager Martin Currie says: “We are proud to receive industry recognition for our sustainable investment process. Our investment philosophy is that the inclusion of ethical values is complementary to our focus on high-quality companies, and thus does not compromise the generation of a growing income stream.”

Franklin Templeton’s Managing Director and Head of Australia and New Zealand, Felicity Walsh says: “We congratulate the Martin Currie Australian equities team for this achievement. This award reflects the team’s long-standing commitment to excellence in Australian equity investing with a focus on crafting strategies designed to deliver income with sustainable values.”

“This strategy benefits from the close collaboration of the well-resourced and experienced Martin Currie Australia team,” she says.

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Felicity Walsh

Martin Currie Australia, the active equity specialist investment manager of Franklin Templeton Australia Limited (Franklin Templeton), has been awarded Australia’s ‘Best Specialist ESG Fund’ for the Martin Currie Sustainable Equity fund.

Established in 2005, the Hedge Funds Rock + Australian Alternative Investment Awards honour investment management industry’s top performers, assessed through a combination of quantitative and qualitative factors annually.

At this event (held on September 29, 2022) Franklin Templeton was also recognised as the ‘Best Global Manager Operating in Australia’.

Martin Currie’s co-portfolio managers Will Baylis and Naomi Bant note: “We are delighted to receive The Australian Alternative Investment Awards for Australia’s Best Specialist ESG Fund. At Martin Currie Australia, we have a long history of incorporating our proprietary work on sustainability into our investment process.

“The Martin Currie Sustainable Equity Fund uses our fundamental insights from an experienced investment team to build a portfolio with high sustainable characteristics without forfeiting long-term financial returns. Our engagement with companies is key to our insights and investment philosophy.

“We believe companies that can transition to renewable energy solutions, improve the efficacy around their supply chains, and focus on reducing their impact on the environment will generate long term value for our investors while contributing to a more sustainable society, environment and economy,” they note.

Franklin Templeton’s Managing Director and Head of Australia and New Zealand, Felicity Walsh commented: “We are proud of our established and experienced teams that strive to build well-performing portfolios that position Franklin Templeton as leaders in the industry.

“We are thrilled to receive this recognition from industry peers as winners in both categories for the Martin Currie Sustainable Equity Fund and our efforts as the Best Global Manager Operating in Australia.”

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Julian Ide

Martin Currie, the active equity specialist investment manager of Franklin Templeton, and steward of A$25 billion in assets under management as of February 28, 2021, has significantly enhanced its analysis of environmental, social and governance (ESG) factors.

In its newly published annual stewardship report^[1], Martin Currie outlines its activities over the past year, which include mapping investee companies to the U.N.’s Sustainable Development Goals (SDGs) and creating a carbon value-at-risk model to calculate the potential impact of carbon pricing on a company’s earnings and market capitalisation.

At the same time, Martin Currie has increased its analysis of modern slavery risks across supply chains.

“Good stewardship is an integral part of our core purpose. It is gratifying that this sentiment is growing in the asset management industry but we know we all need to do more and act more quickly in order to make an impact,” said Martin Currie CEO Julian Ide.

“While we ceaselessly encourage our investee companies to take action, we recognise that we must hold ourselves to the same high standards. That is why we work every year to foster diverse and inclusive workplaces, to be trusted advisers to our clients, and to positively contribute to the communities where we live and work.”

Mapping to sustainable development goals

As part of its commitment to broaden ESG transparency and to demonstrate the rigour used in its analysis, Martin Currie mapped the activities of companies in which it invests against the 17 U.N. Sustainable Development Goal (SDGs).

“While the 17 goals set the overall framework, it’s the underlying 169 specific targets that are most relevant to companies. Our analysis has focused on the extent to which companies are able to address or contribute to the relevant targets with more of an emphasis on how – rather than just what – goods and services are delivered,” said David Sheasby, Head of Stewardship and ESG at Martin Currie.

“In a number of cases companies are already working through the various SDGs and selecting the appropriate goals and targets to align with their own operations. We believe that helping companies along this path with constructive dialogue is also an important element in achieving sustainable development.”

Carbon Value at Risk analysis

“COVID-19 temporarily upended the world’s operating assumptions but the pandemic also reinforced the importance of managing the even greater systemic risk posed by climate change,” Sheasby noted.

“Indeed, as the year progressed, we saw renewed policy efforts to reduce carbon emissions and, at a company level, climate change continued to be the dominant theme for our clients.”

As part of its continuing efforts regarding climate change, Martin Currie developed a proprietary carbon value-at-risk tool to analyse the sensitivity and potential impact of carbon pricing on a company’s earnings and market cap. This enables the firm to better understand the future impact of climate and energy policy changes on companies and, by extension, its portfolios.

Will Baylis, Portfolio Manager for Martin Currie Australia’s (MCA) Sustainable Equity strategy highlights: “The carbon value-at-risk tool is used directly in the portfolio construction process of MCA’s low-carbon focussed Sustainable Equity strategy and Green Value strategy to purposefully tilt away from those companies with high carbon risk and towards those with lower carbon risk.”

Modern slavery

Modern slavery is estimated to affect more than 40 million people worldwide; women and girls are thought to account for more than 70% of all victims.

While awareness of this issue is increasing, Martin Currie calls on asset managers to do more, specifically to monitor supply chains and ensure social exploitation is not present in companies’ operations.

Martin Currie recognises the risks presented by modern slavery and human rights breaches. As such, it has instituted a framework to identify risk factors and behaviours that may indicate a material risk of modern slavery within a business or its supply chain.

“While the perception is that social exploitation only occurs in emerging nations, recent high-profile cases in more ‘developed’ countries have shown that the problem is truly endemic. The globalised nature of supply chains means that modern slavery can be an invisible component in a range of everyday items, from the cars we drive to the clothes we wear. We are seeing increased demand for transparency on this issue from our clients,” Sheasby said.

Following the introduction of the Australian Modern Slavery Act which heralds new reporting requirements on modern slavery for Australian companies, the MCA investment team recently undertook a structured engagement with investee companies on modern slavery.

Reece Birtles, Chief Investment Officer for MCA said, “We reached out to 190 top ASX companies to question them on governance, policy, process and any incidents of modern slavery. After completing an in-depth review of all the responses, identifying best practice and where clear gaps exist, the results will be incorporated into our overall ESG framework and provide a focus for future engagements.”

Additional ESG Highlights from Martin Currie’s newest stewardship report include:

• Globally, the firm recorded 681 one-on-one engagements with 187 corporate management teams in 2020. The MCA team recorded almost 100 of these engagements.
• It voted on 5,271 resolutions across 543 shareholder meetings, demonstrating the firm’s commitment to investing that considers ESG factors alongside financial statements.
• It continued to refine its proprietary ESG scoring system. This dynamic approach helps portfolio managers consistently measure the way companies approach ESG. It also informs their engagements with investee companies and assists in guiding them toward positive change.
• It became a signatory of Climate Action 100+, an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. Martin Currie is the lead investor on an Indian cement company that is one of the target companies.

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[1] https://www.franklintempleton.com.au/downloadsServlet/?docid=kmhhlo2q

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Reece Birtles

Legg Mason’s affiliate Martin Currie says that despite the ‘green shoots’ in consumer spending leading into the recent reporting season and company results being broadly in-line with expectations, the EPS revisions by brokers post-results had the worst ratio of downgrades to upgrades in over 10 years^[1].

Martin Currie Australia’s Chief Investment Officer, Reece Birtles notes: “The ‘green shoots’ post the election, lending relaxation by APRA, and tax cuts help lifted consumer sentiment and spending. Numerous global central banks, including Australia, also cut interest rates which has helped put cash in consumer’s pockets and liquidity into the system.”

“While it was understandable that the market had expected to see weak results due to the ongoing global uncertainty since last reporting season, we believe that the market was expecting a much more optimistic outlook going forward. Instead, managements across the boards talked about ‘air pockets’ in their outlook such as low infrastructure spending and advertising, and the forecasts for the period ahead were very conservative.”

Birtles says that what the poor revisions by brokers and conservative outlook does is mask some of the positive signs and fundamental themes found throughout the results , which are:

• The consumer spending is better than expected
• The housing market is stabilising
• Funding environment is improving, but credit availability issues remain

However:

• B2B demand is still weak due to lack of government stimulus for businesses
• Business growth lagging from low housing starts and delays in infrastructure projects
• Miners boosted by iron supply disruptions, but current high dividend payout ratios are unsustainable
• Accounting chaos from AASB 15, 16 and 9 changes impacted many company results

Will Baylis, Portfolio Manager who oversees the ESG process for Martin Currie Australia also notes that ESG issues are being treated more seriously by boards.

“While not immediately recognisable as an ESG issue, the AASB 15, 16 and 9 accounting changes were in fact one of the topics we discussed with various Boards given their Governance responsibility for the accounting practices of the firm.

“Ultimately the Board is responsible for whether company accounts are prepared in accordance with AASB standards and provide a true and fair view of the entity’s performance. Therefore, questionable accounting practises raise questions about the judgement and oversight of the board, given accounts are being prepared by management,” says Baylis.

In terms of the outlook for Australian equities, Birtles notes that while economic and financial indicators suggest a growing probability of a global recession, he expects domestically focussed Australian companies to perform relatively better than companies dependent on global growth or impacted by geo-political/macro issues, with the structural growth drivers such as population and employment growth important characteristics.

His overall outlook for the domestic economy remains relatively positive as the fiscal and monetary stimulus will continue to flow through to consumption in 2019 and 2020.

“We view that almost every single asset class and factor globally is fully priced, except for Value. In Australia, valuation levels for the equity market may also be on the fair to high side in aggregate, but this hides a large divergence between premiums for defensive/quality/growth assets vs cyclical/value assets.”

“We see heightened valuation dispersion opportunities within the Australian market and are positioning our portfolios towards more value opportunities, believing any policy response or stabilisation of data will lead to a reversal of high value spreads.”

“While it is difficult to pick exact turning points, this September, we have already begun to see signs of a Value factor rebound in Australia,” says Birtles.

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Actively investing across a diversified range of Australian asset classes, including equities, listed real assets, fixed interest and cash, this strategy is delivering results for investors, especially retirees seeking regular income, says Andy Sowerby, Managing Director Legg Mason Australia.

The multi-asset approach invests in a blend of Martin Currie Australia’s award-winning Real Income strategy, innovative Equity Income strategy, and is complemented by the Australian Fixed Income and Cash capabilities of fellow Legg Mason-affiliate Western Asset Management.

“It’s no surprise to us that this fund was rated as the number one performing fund by Morningstar against 135 other similar balanced funds, and has delivered 11.9% p.a. total returns (net of fees) over the past three years.” says Sowerby.

Martin Currie Australia Portfolio Manager, Will Baylis, says: “We believe that a retirement income strategy and asset mix should be very different to a typical balanced fund strategy for people in the accumulation phase of their investments. Based on robust feedback from investors, we set out to deliver a fund for retirees that not only provides reliable income that exceeds the rate of inflation, but also reduces the need to draw down on capital, thus increasing the likelihood that Australian retirees achieve the income needed for a comfortable retirement.

“The multi-asset combination provides retirees with the expected benefits of low volatility (from fixed income), inflation protection (from real assets) and long-term income growth (from equity income), which minimises the need to draw down on capital and provides higher income.

“We use dynamic asset allocation to ensure lower capital volatility than equity indices, and less income volatility than cash, but much higher income than what can be achieved investing only in cash or term deposits.

“The fund continues to exhibit overweight allocations to Legg Mason Martin Currie Equity Income Trust and Real Income Fund, and a corresponding underweight to the Legg Mason Western Asset Australian Bond Trust. This is based on our forward yield expectations for each of the underlying funds,” says Baylis.

Sowerby adds: “The Diversified Income strategy brings together Martin Currie Australia’s deep understanding of the income needs of retirees, and a 40+ year pedigree in managing balanced funds. The Legg Mason Martin Currie Diversified Growth Trust, which is targeted at accumulation investors, for example, has also achieved a five-star Morningstar Rating * over five years and delivered 13.8% p.a. total return (net of fees) and is ranked 1st of 196 funds over 5 years in Morningstar Multisector Growth Category as at 31 May 2017..”

Both the Legg Mason Martin Currie Diversified Income Trust and the Diversified Growth Trust have received a Zenith rating of “Approved” and a “Recommend” rating from Lonsec.

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