Sustainable Investing, which considers Environmental, Social and Governance (ESG) factors has evolved meaningfully over the last few years.
“People are talking about ESG, Sustainability, Impact, Being Socially Aware or the Triple Bottom Line” – Philip Moffitt, Co-Founder Beckon Capital, Director at Aware Super and Director at Green Road Consulting.
But what exactly constitutes ESG?
Environmental, Social, and Governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments alongside financial performance. Briefly summarised:
- Environmental criteria consider how a company impacts the environment and nature.
- Social criteria examines the relationship between the company and its suppliers, employees, customers and the community in which it operates.
- Governance criteria explores a company’s leadership and business practices, pay, finances and internal controls and measures.
“ESG is a thing which is used by fund managers and analysts to look at the risks of an investment. It is a matrix that’s looking at how risky this business is going to be from a financial point of view. Clients and investors however, don’t generally think of ESG in these terms, instead thinking `I’m going to buy this product or invest in it because it fits my value frame’.” – Elizabeth Hatton, Director & Financial Adviser at Viva Financial Planning.
There are a number of catalysts driving this momentum and interest in sustainable investment.
Firstly, an increase in demand by consumers towards ethical and sustainable living. Many consumers are seeking more sustainable products and are willing to pay for them. From packaging, to alternative plant-based foods, environmentally-safe household products, eco-friendly fashion and homewares. Companies are responding to these preferences by altering their product lines as well as being more mindful of their production and distribution which has a ripple effect on their supply chains.
Conscious spending and values based investing decisions are increasingly viewed as a tool to vote with one’s dollars towards the type of world they’d like to live in. And on top of this, is the growing awareness that financial activism is an effective tool for environmental and societal change. People are beginning to realise their influence outside of the political system, understanding the impact that large amounts of money can have on businesses and investing and the difference that can be made in creating a better world for themselves, their family, friends and community.
A recent survey by RIAA in 20201 revealed that 88% of Australians surveyed believed that it is important for their financial adviser to provide responsible and ethical investment options. And this interest is translating into significant inflows into this investment space. According to RIAA,2 Responsible Investment AUM increased by $298 billion to $1,281 billion in 2020.
Investors (particularly younger generations) are showing increased interest in putting their money where their values are. And super funds and fund managers are seeing this as an opportune way to engage with a typically disengaged sub-section of investors.
This shift in consumer and investor sentiment and consciousness has the potential for significant impact at global scale. In fact the United Nations (UN) announced that private funds play an imperative role in helping to achieve the environmental and social goals that have been set to end poverty, protect the planet and improve the lives of the world’s population. One such commitment is the Sustainable Development Goals (SDG) 3 set in 2015. These 17 goals set for the world to collectively achieve are designed to help the world transition to a greener and more equitable economy.
With this comes the realization that Financial Advisers play an important role as intermediaries supporting consumers and investors to direct the flow of private funds towards these critical sustainability solutions.
“In my mind there is a lot of money going through financial before it even reaches these institutions, so I’ve really felt like financial advisers are such an integral link in this investment chain and in getting money from people to the Sustainable Development Goals”. – Alexandra Brown, Founder of Invest with Ethics, Head of Research at Altiorem and Board Member of the Ethical Advisers Co-operative.
Alexandra further goes on to discuss the age-old question around performance of ESG investments. “The performance myths have been busted so many times that I can’t even believe that this is still a conversation”. This is a sentiment backed by Paul Garner CFP and CEO of Novo Wealth.“There is an endless amount of research showing that you no longer have to sacrifice returns, however it can be a little bit more expensive due to the active management style.”
Taking a look at the RIAA Investment Benchmark Report Australian 2021 and you can see the net performance 4 over a 10 year period has been on par if not better than the average in the mainstream market.
Recent issues such as climate change and COVID-19 demonstrate the fragility of traditional business approaches, and highlight the importance of resiliency and good governance practices in business. Businesses now face pressure from shareholders, investors and stakeholders to transition towards more environmentally, socially, and economically sustainable business practices in order to support future generations.
“Sustainable businesses or assets trade at a higher valuation than unsustainable ones. If you think somethings going to last for 100 years, you’re prepared to pay a higher multiple of earnings on it, than if you think it will only last for 10 years”. – Philip Moffitt, Co-Founder Beckon Capital, Director at Aware Super and Director at Green Road Consulting
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This article was written based on discussions held in the XY Adviser Podcast Ethical Investment Series # 12 hosted by Fraser Jack in conversation with Elizabeth Hatton, James Harwood, Paul Garner, Alexandra Brown, Philip Moffitt. The full podcast can be found here.
References
1 Source :RIAA From Values to Riches 2020 Consumer Survey
2 Source: RIAA Australian Investment Benchmark Report 2021
3 Source: United Nations Transforming our world: the 2030 Agenda for Sustainable Development. SGD Principles
4 Source :RIAA Responsible Investment Benchmark Report Australia 2021, FIGURE 10 Performance of responsible investment funds and mainstream funds (average, net of fees over 10 years)
