How investor demand is driving investment managers to magnify their ESG impact
Despite being driven to make a real difference, many investors (individuals and institutions alike) struggle to identify how they can properly embed ESG (environmental, social, and corporate governance) principles into their investments and magnify the impact they make. The emergence of new ESG aligned products does make it a little easier however the onus is still on investors to do their own research to ensure the product they choose is ‘true to label’ and is as ethical as they expected. The Australian Securities and Investment Commission have indicated that they will be targeting “greenwashing” and companies claiming that they are more ethical the in fact they are which is certain to be of great help to investors.
Following in Europe’s footsteps, Australia is beginning to see a surge in investors seeking ethical investment products with the intent to make a difference, not just a profit. Similarly, Australia has seen new products emerge in recent years which have embedded ESG considerations, to varying degrees, to support this increasing demand. The growing number of products reinforces the importance of independent product ratings to allow investors access to impartial research and an easier means for comparison.
The Responsible Investment Association of Australasia (RIAA) is fiercely independent and have long been providing investors unfettered access to their rated products and the key involvement areas each product manager screens in and out (either partially or fully). This research is not only for individual investors but can (and is often) also used by institutional investors, organisations and foundations to identify a list of suitable investment products they could invest their current assets with in a way that compliments their ethics and values framework and suits their risk appetite/time horizon.
As mentioned earlier, investors now have dovetailing interests, making a difference and making a profit. Even in the face the uncertainty brought forth by the Covid-19 pandemic, when market movements are increasingly volatile, returns of responsible investments have proven to be less volatile and, in many cases, more consistent than the product peers that continue to invest in controversial areas such as fossil fuels, gambling, alcohol, etc.
Simon O’Conner, Chief Executive Officer of the RIAA, was recently quoted as saying “Analysis from RIAA and global investment houses shows that, across diverse asset classes and time frames, responsible and ethical investment products are largely outperforming their mainstream counterparts.” Further, it isn’t just research houses identifying this, O’Connor went on to say that individual consumers “are too are seeing that companies which look after their employees, minimise their impact on the environment, have good governance and protect human rights make for better investments”.
Importance of research
The increase in ethical products has, of course, lead to an increase in the products rated by the RIAA. The list of rated products, and the key involvement areas that many opted to retain in their portfolio was one of the main reasons why Haven Wealth Partners developed its Absolute Ethical Return Fund. Seeing what controversial involvement areas other product providers accepted as part of their portfolio was the main driver behind the Haven Wealth team to develop a purer product and one that embraced more socially responsible companies and industries, and completely screen out fossil fuels, resources, nuclear, gambling, alcohol, tobacco, pork products, child exploitation, etc. By virtue of these negative screens, the Haven Wealth Partners Absolute Ethical Return Fund also appeals to investors seeking a product better aligned with their faith which is often another key decision-making factor.
Due to the relatively low number of products in this space, investment management fees tend to be higher on average for ethical products than traditional investments due to the increased effort required for research and screening. It has been suggested that the low number of products has not created the competition necessary to drive prices lower. Haven Wealth Partners is dedicated to ensuring ethical investors are price makers and not price takers, and have priced their new investment option accordingly. The fundamental law of supply and demand dictates that a thirst for more options, and the development of more products, will drive fees down and Haven Wealth Partners have sought to lead this movement. As has been the case with traditional investments, fees are the first and main hygienic factor addressed when investors are researching options. At Haven Wealth Partners we see low fees and stringent screening as walking hand in hand as the Fund seeks to deliver to investors now and moving forward.
Climate change action
The increased investor demand for products focused on social justice, ethics, sustainability and carbon neutrality is an interesting development especially in a country whose GDP is so heavily reliant on exporting iron ore, coal, and commodities. This contradiction could yield a bigger (and more exciting) change with large organisations under more pressure than ever to ensure they embed more ethical and sustainable practices as part of their business-as-usual activities.
It is encouraging to see that an increasing number of listed Australian companies are now reporting how they are working towards some, or all, of the 17 Sustainable Development Goals adopted by all United Nations Member States in 2015. These goals provide a shared vision and a coordinated plan for peace and prosperity for people and the planet, now and for future generations. They encompass areas from the provision of the most basic human rights (such as access to clean water) through to complex environmental and social matters (such as climate change and gender equality).
Active Stewardship
One of the core tenets of Haven Wealth Partners, and indeed other ethical product providers, is the dedication to active stewardship. It is essential that investment funds, including superannuation funds, use their investment as their ‘seat at the table’ and a chance to influence decision making and direction of big corporations. Further, fund managers must properly assume the role of investor representatives and provide a clear and detailed account of proxy voting relating to the equities they hold. In the spirit of transparency, and in line with RIAA expectations, managed funds and superannuation funds alike should publish their voting activity to ensure that their investors remain well informed.
At Haven Wealth Partners we are optimistic that there will not only be significant growth in the number of ESG aligned products on the market, but also that an increasing number of individuals and institutions gravitating towards more ethical and sustainable practices and investment alternatives. The ESG, sustainability and the carbon neutral movement need not spell the end of industry altogether but look to reshape business operations to ensure that there is a net positive result and a continued desire for companies and individuals alike to make smarter choices.
Nick Heuzenroeder
CEO / Managing Director
Haven Wealth Partners
Disclaimer: Haven Wealth Partners Pty Ltd is a corporate authorised representative (001292148) of Shartru Wealth Pty Ltd (AFSL 422409), and can provide you with general information only. To read the full disclaimer please click here.