Perpetual's newest partner wants radical change

The head of Perpetual's latest acquisition wants to turn the 134-year-old Australian wealth manager into a world-leading ethical funds giant with sustainable investment strategies embedded into every portfolio.

But is Perpetual's boss Rob Adams on board? “Not yet,” Trillium Asset Management CEO Matthew Patsky said from Boston.

Perpetual completed the $63.8 million acquisition of Trillium this week, and will soon start moving Australian investors into the US fund manager's actively managed global portfolios of companies with strong environmental, social and governance (ESG) ratings.

Perpetual CEO Rob Adams said the term "ESG" might become obsolete. Credit: Louie Douvis

Mr Adams said he was surprised by the positive market reaction in January when it was announced Perpetual would acquire the 38-year-old American firm known for pressing investors to divest from South Africa during apartheid. Trillium, which has $5.7 billion under management and is specialised in offering portfolios that take into account companies' environmental and social risks, will keep operating as an independent business under Perpetual's ownership.

Since the takeover was announced, Perpetual has received inquiries from institutional investors involving some of the country’s largest superannuation funds as well as asset consultants and private clients, Mr Adams said.

“Having being involved in my career in over 30 [mergers and acquisition] deals in asset management, I can’t actually recall a transaction that had such universal appeal on announcement,” he said.

The reaction was symptomatic of a growing demand for ESG products in Australia, Mr Adams said, and would help the firm expand its client base to younger demographics. “There are large percentages of Gen-X and Gen-Y who will only invest in ESG-style options.”

Trillium’s investment approach screens out companies considered to be in structural decline. Fossil fuels and extractive industries such as miners fall within this category and for this reason, Mr Patsky said its portfolios have only a 2 per cent exposure to ASX-listed companies.

“We’re staying away from pretty large sectors of the Australian market,” Mr Patsky said. “In the US, we’ve seen costs get so high for simply borrowing and debt that the major players in thermal coal have filed for bankruptcy. This is likely to be a global trend. It’s just simply a process of how long it takes and I would not be surprised to see the day if we are no longer burning any coal for production of electricity.”

Perpetual does not have a “house view” on the outlook of thermal coal or fossil fuels more generally, Mr Adams said, but environmentally inclined clients were offered ethical investment products.

Mr Patsky wants the Australian funds manager to go further. “If I am successful, we will see within five years that ESG has become integrated into every investment strategy in Perpetual, and we will be the premier ESG shop in investments globally.”

If I am successful, we will see within five years that ESG has become integrated into every investment strategy in Perpetual, and we will be the premier ESG shop in investments globally.

Trillium CEO Matthew Patsky

This would not necessarily involve dumping mining stocks, but using engagement and shareholder activism to promote a faster and more coherent transition to sustainable business models.

Mr Adams was supportive of the idea but stopped short of committing to broadening his firm's ESG approach immediately. “It’s a terrific ambition that Matt has. Who knows? In 10 or 15 years’ time, the phrase ESG might have disappeared.”

Trillium uses a variety of metrics to measure a company's ESG rating. The firm has ramped up its use of shareholder activism this year to demand companies make EE01 reports – US regulatory filings that measure equality of pay within companies – public to get a better understanding of corporate governance across the stocks it holds.

When Perpetual made its bid for Trillium late last year, Mr Patsky ran the ruler over the potential buyer.

“For interest, concern and true passion for doing the right thing, they [Perpetual] scored well,” Mr Patsky said. “When you look at all the issues of diversity in senior management ranks, there was at least an acknowledgement of 'we need to do better and we’re working on it'.”

Trillium wants to see a 50/50 gender representation at Perpetual and Mr Adams said there was "still plenty to do".

“To Matt’s point, it’s not where we need to be but we’re certainly chipping away," Mr Adams said. “Our position of diversity by any definition always needs improvement.”

Perpetual has hired two women to the company's seven-member executive committee since Mr Adams took on the top role 20 months ago, and now just under 40 per cent of senior leadership roles are occupied by women.

Perpetual's profits have taken a hit in recent quarters, suffering high fund outflows as a result of weak performance. The historic investment house saw further challenges following the sharemarket's "quick and dramatic" fall-off in March, but Mr Adams said "green shoots" were now appearing in the rebound since.

Analysts reacted positively to Perpetual's acquisition of Trillium – with Morgan Stanley and Bell Potter both predicting growth opportunities. Perpetual's share price has risen by 8 per cent since the announcement was made.