The recent devastating bushfires in Australia have driven the climate change conversation further up the political and public agenda.
Industry is also responding with Blackrock, the world’s largest fund manager, recently pledging to toughen its stance on climate change by reducing its investment exposure to thermal coal.
Overall recognition is growing that you don’t have to be an activist to make a difference to the planet. Playing a role in tackling social issues can be as simple as being more aware and mindful of the choices we make, from the products we buy to our investment decisions. Increasingly consumers are demanding more investment choices that align with their values and beliefs and the investment industry is meeting that demand with a range of sustainable investment options.
Investing sustainably can take on many forms, though generally it considers a combination of environmental, social and governance (ESG) factors and investing in a way that promotes global sustainability, as defined by the United Nations goals of 2015. Further detail of the ESG framework is outlined below:
When thinking about the environment, sustainable investing addresses issues such as resource efficiency and the impact on the environment whether it be through ‘green policies’, the company’s carbon footprint or the use of resources like water to create revenue. Ultimately, one of the goals is to finance energy transition towards a greener energy mix and lower the use of fossil fuels.
In terms of social impact, sustainable investing addresses how the business behaves — especially around ‘human capital’. It’s not just what they pay their workers but also how they help in areas, such as, health and demographics, working conditions, education and the overall labour practices of the company.
In a world of arguably various ethical standards, assessing governance or the quality of management and the board is paramount. How are they incentivised? What controls and oversights are in place? And, it extends further into the political policies of the country where the company is based as well as considering gender diversity and fairness issues.
Using these guidelines there are also different ways companies are judged when deciding on their level of sustainability and social responsibility. The two most common means are negative or positive screening – a process of filtering companies, industries or countries based on their values, practices and engagement in certain behaviours.
There’s no doubt that sustainable investing is taking off in Australia. The ‘Responsible Investment Benchmark Report 2019 Australia’ found that responsible investments accounted for $2.24 trillion or almost half (44%) of assets under management in 2018.
The reason for the rise is clear. Many investors wish to balance their investment return with a ‘moral’ return. They want to feel that the money they are investing isn’t doing any harm and is giving back to society or the environment. And the latest empirical research appears to show that this doesn’t need to come at a detriment to financial returns. On average there is no statistically significant cost, in fact there is often a benefit1.
At Shadforth our investment philosophy is evidence-based, meaning our investment decisions are grounded in science and academic research. Using historical data and long-term observations of markets our investment managers are able to determine the factors that drive performance, such as company size and profitability, and apply a higher weighting to these stocks. One of our duties in acting in the best interests of our clients is managing these filters to reduce the risks to our end clients and optimising performance in line with risk appetite.
The same methodology can now be applied to add sustainability as another factor or portfolio overlay. We currently offer a number of sustainable fund options as part of our product suite and are in the early stages of assessing how sustainability could be added to our core trusts and new funds without reducing diversification or sacrificing expected returns. The initial findings are very encouraging and support further detailed research.
We’d love to hear your thoughts on sustainable investment and whether this is important to you — please email your feedback to us at firstname.lastname@example.org. If you have any other questions, as always please speak to your Private Client Adviser.
1 Responsible Investment Association Australasia, ‘Responsible investment Benchmark Report 2019 Australia’, 2019.