Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 124

Responsible investing is now retail and mainstream

Banks are walking away from major resources projects, super funds are dumping stocks based on human rights induced investment risks and climate change related shareholder resolutions are gaining 98% support.

Few in the investment industry have failed to see a change underway, as some of the nation’s largest investors start taking a more active role in understanding issues that were traditionally considered non-financial.

Environmental, social and corporate governance issues – or ESG – are attracting an ever-stronger focus by investors, companies and shareholders, and these factors are proving to be as critical to understanding market valuations as EBITDA.

It’s not about suddenly becoming ethical

This is evidenced in the advisory relationship between CBA and the Indian listed company Adani recently coming to an end, super fund HESTA selling down its stake in Transfield last week, and earlier this year, BP supporting a climate change resolution at its AGM, which attracted an unprecedented 98% of the vote.

No, the majority of investors are not suddenly becoming ethical investors. Recent trends highlight how these ESG issues are clearly core business risks that investors are closely monitoring as part of their investment decision-making. And yes, at times, they are choosing to sell out of companies (dare I say, divest).

Responsible investment is a broad term that captures many different investment approaches, and an increasingly major part of Australian’s investment community. Indeed, the recently launched Responsible Investment Benchmark Report 2015 found that responsible investment strategies now sit atop 50% of professionally managed assets in Australia, at $630 billion in Assets Under Management (AUM).

The styles range from integrating ESG factors into investment decision-making (accounting for 95% of the $630 billion AUM), through to screening investments (positive, negative and best of sector), sustainability-themed investing, and impact investment. The last three categories accounted for $32 billion AUM at the end of 2014.

What investment action is really underway?

Uniting all of these investors is the commitment to systematically considering ESG and/or ethical issues as a core part of the investment decision-making process. Not instead of, but in addition to, deep systematic financial analysis.

According to CalPERs and many of the world’s largest asset owners, undertaking ESG becomes the requirement to win mandates, with those who don’t manage these risks having “a sub-par investment process”.

Nine of Australia’s largest 10 asset managers, and around 50% of the top 50 super funds have stated a commitment to understanding a broader set of risks and investment drivers than those reported in financial statements.

Source: Responsible Investment Benchmark Report 2015

This strong uptake is resulting in an increasing appetite in Australia to drive a variety of strategies to better understand and mitigate these risks. We’re seeing much greater corporate engagement, both direct and collaborative, between investors and listed companies, a strong focus on voting, as well as weighting portfolios, based on ESG factors (including carbon), allocating to sustainability-themed funds (e.g. green bonds, green property, sustainable agriculture and forestry), and selectively divesting of certain holdings or industries.

Perhaps best exemplifying the change currently underway is the rapid move of around 30 super funds over the past two years to sell out of tobacco stocks. This is notable in the way it signals a willingness to act strongly on certain issues.

It’s not only for institutional investors

One of the most interesting movements of all is the sudden awakening by retail investors (including charities, high net worth and family offices) to the fact that there are options to invest in line with their values and beliefs.

This segment of the market has lead a surge in retail demand for ethical investments that has seen AUM double in just two years, to $31.6 billion. Where there were four fund managers managing over $1 billion in ethically-managed AUM three years ago, there are now eight (and soon to be nine).

Source: Responsible Investment Benchmark Report 2015

To those in the super industry, it would not come as a surprise that the surge in consumer demand for these options comes when member engagement with their super seems to have started to improve. Polling tells us that a massive 69% of Australians expect that their superannuation is invested responsibly and does no harm. These are not ethical investors, but mainstream Australians who simply expect their retirement savings to be managed with their base level of values being respected. There are, after all, few out there who would put their hands up to profit off the production of cluster bombs or child labour.

As members of the public start to open the letters from their super funds to look at who they are invested in, there are increasing numbers who aren’t pleased with what they are discovering.

This retail story is inextricably linked with the institutional story as one feeds the other with growing momentum.

There are multiple drivers at play which are directing more consumers towards responsible investment products. With ethics and economics fairly closely tied together, this is delivering on investment outcomes.

Responsible investment is truly what a fiduciary should be delivering if they are deeply grappling with investment risks over all time frames in the best interests of their clients.

 

Simon O’Connor is Chief Executive Officer of the Responsible Investment Association Australasia (RIAA).

 

3 Comments
Warren Bird
September 03, 2015

Interesting development, but this isn't quite the same thing as the 'responsible investment' that the article is about. Responsible investment overall is about making the normal sort of investment decisions - stock picking - in a way that takes account of environmental, social and governance issues in some way. The goal is usually to maximise returns by appropriately pricing assets for the risk that ESG factors will impair earnings growth. Contrary to Arthur's concerns, RI isn't about saving the planet, but about making sure that government policy decisions that are aimed at saving the planet, or general social trends reflecting the general public's concerns about the environment, don't blow up your investment portfolio. (EG by recognising that cutting carbon emissions meaningfully will hurt coal producers and therefore lead you to hold a smaller allocation to them in your portfolio). RI is also not ethical investing - they are related, but different.

Impact investing is different again. It's about making decisions that, while sound financially, also have a direct, measurable and meaningful social outcomes. Normally it requires government involvement as it's usually government that wants the cheapest option for delivering social policy outcomes and is prepared to pay the income on an impact investment if the program is successful.

I wish the industry would stop referring to Social Impact BONDS. These investments are not bonds, the income is not fixed or guaranteed in any way by the issuer. They are conditional. If a program fails, the return will be negative - no amortising back to par, just a loss of capital. And if the program succeeds then there is usually a sliding scale of income pay rates depending on the rate of success. They are a new asset class, to which I am attracted, but they are not 'bonds'.

Graham Hand
September 03, 2015

In case we thought this was marginal ... HESTA has partnered with Social Ventures Australia to launch one of the country's biggest impact investment funds.

The $32 billion health and community services industry fund has committed $30 million - the largest single commitment to the local impact investment market made by an Australian superannuation fund - to create a dedicated fund managed by Social Ventures Australia (SVA).

The move is aimed at building a pipeline of investments that can deliver both financial returns and measurable social impact.

SVA and HESTA have designed a dedicated fund, the Social Impact Investment Trust, to allow HESTA to make direct and indirect investments in a range of businesses, housing projects and social impact bonds that deliver both financial returns and identifiable and quantifiable social impact.

SVA is actively seeking similar partnerships with other investors, with the aim of raising $100 million in funds under management over the next 12 months.

Arthur
August 27, 2015

When someone shows me an “ethical” fund manager who manages funds for free, for the good of the planet (or universe, or wombats, or whatever) instead of making payments on his Porsche or Lambo (AND beats the index consistently for say 10 years), then I will invest!

 

Leave a Comment:

RELATED ARTICLES

Beyond the acronym, navigating important ESG choices

Investment learnings from the COVID-19 crisis

Top 10 ESG issues for 2019

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.