Results are clear: clients don’t need to sacrifice their ethics for financial returns, reports Gayle Bryant.
Every $1 in $2 dollars professionally invested in Australia is in some form of ethical strategy.
That fact, reported by the Global Sustainable Investment Alliance shows the sector has moved further into the mainstream of late, with the trend towards ethical (or responsible) investing showing no sign of slowing down. The alliance’s Global Sustainable Investment Review 2016 makes clear that momentum is worldwide.
Responsible investing basics
In general, ethical investing requires a selection process supporting environmental and social factors and avoiding anything that harms people, society and the environment, such as coal, weapons, gambling, tobacco or alcohol.
Locally, the peak body for this sector is the Responsible Investment Association Australasia. Its most recent report found responsible investment funds are outperforming their average mainstream counterparts year on year.
The association’s Responsible Investment Benchmark Report 2017 showed “core” responsibly invested Australian share funds and balanced multi-sector funds outperformed their equivalent mainstream funds over three, five and 10-year spans.
Responsible Investment Association Australasia chief executive officer Simon O’Connor says this puts to bed the myth that you need to sacrifice financial returns to invest ethically.
“It is well established that companies with better environmental, social and governance practices are more sustainable and deliver higher returns over time,” he says.
“More investors are becoming aware of this and asking questions about whether the companies they invest in are consistent with their values.”
Scale of responsible investing
The association’s report found responsible investments have more than quadrupled over the past three years to $622 billion, with nearly half (44 per cent) of Australia’s assets under management now being invested through some form of responsible-investment strategy, such as:
- negative screening (avoiding ‘harmful’ products and services)
- impact investing (to generate positive social, cultural, environmental, financial returns)
- sustainability themed funds (eg. clean-energy funds, green property)
- integration of environmental, social and governance considerations.
Defining ethical investments is tricky as what is ethical to one may not be to another. The Global Sustainable Investment Alliance reported that the negative-screening approach was applied to $US15 trillion of investments in 2016.
One segment of the sector, impact investing, is gaining prominence in Australia and overseas.
Impact investing is a way of intentionally backing ventures and assets that have a positive social or environmental outcome as part of their business models. These outcomes are measured as closely as their financial returns.
The Global Impact Investing Network’s Annual Impact Investing Survey 2017 analyses organisations that collectively manage nearly $US114 billion in impact assets. The survey found this group invested $US22.1 billion into nearly 8000 impact investments in 2016 and plans to increase this by 17 per cent in 2017 to $US25.9 billion.
O’Connor says there continues to be strong growth in responsible investment products in Australia.
“There is a lot of diversity around ethical funds offering all kinds of assets and investment styles,” he says. “There are also many ETFs [exchange-traded funds] coming to market making it much easier because of their low barriers to entry to get exposure to good ethical products.”
O’Connor says the main way to invest ethically is generally via managed funds and ETFs but adds it has now gone beyond investment.
“People are also considering the implications of where they bank their money and what their super funds offer,” he says.
Demand for 'responsible investing' advice
Responsible Investment Association Australasia survey respondents identified a lack of qualified advice and expertise around responsible products. One financial adviser in this space Trevor Thomas, managing director of Ethinvest, says he’s never been busier.
“This is down to a confluence of factors,” he says. “There is increasing concern over climate change. There was a fossil fuel divestment push a while back with an associated look at getting people to switch. We are also getting more younger people wanting investments that align with their values.”
Thomas says there is long-standing evidence from surveys that show people want their super to invest ethically and are surprised when they learn not all do.
“When clients come to us wanting to know how to invest ethically we first find out what their financial needs and goals are, then ask about their ethical needs before putting a plan together for them,” he says.
“Most people have super so that is an easy place to start. Outside super, banks have ethical options and there is a range of other investments with a specific ethical focus.”
Thomas says one misunderstanding of this sector is that people think they’ll be investing in something like organic vegetables. “Often they are surprised to find you can build a strong, diversified portfolio using a wide range of assets.”
Common ways to invest responsibly
Those offering advice on investing ethically need to do their homework as funds differ in how and why they invest in particular companies. The Responsible Investment Benchmark Report 2017 outlines the following investment methods.
Negative screening systematically excludes specific industries, sectors, companies, practices, countries and jurisdictions from funds that do not align with the responsible-investment goals. Common criteria used include gambling, alcohol, tobacco, pornography and animal testing.
Positive screening involves screening for positive environmental, social and governance or sustainability performance relative to industry peers.
Impact investing targets investments aimed at addressing social or environmental issues while also creating positive financial returns. It includes community investing that involves projects with a defined social purpose.
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