In Australia today, about $600 billion of institutional assets are managed under environmental, social and governance (ESG) principles, writes Instreet's George Lucas.
When you consider that’s about 30 per cent of Australia’s total superannuation pool of $2.1 trillion or is equal to the FUM of the SMSF sector, then it gives you some idea of just how many funds at the big end of town bring an ethical dimension to their investment decisions.
It’s not just a case of saying 'no' to having cigarette, alcohol or gaming companies in a share portfolio.
The fact is more and more institutions are adopting an all-encompassing ethical approach to how they invest and it’s a trend that shows no signs of abating.
There can be no doubt that this trend has been driven, in large part, by socially motived trustees of APRA-regulated funds.
In particular, the appeal of ESG has been strongest in the industry fund sector where many trustees bring to their position an established social and political view of the world that does not always sit comfortably with the fund manager’s traditional investment ethos, which, to misquote former US president Bill Clinton: “It’s the return, stupid.”
That debate of return versus ethics is, to put it crudely, still being played out on superannuation boards.
But if the industry funds have been in the driver’s seat of ESG investing, there has been no shortage of 'mum and dad' investors who are getting into the passenger’s seat.
According to recent figures from the Responsible Investment Association Australasia (RIAA), the value of ethical and responsible investing at the retail end of the market grew 24 per cent to $32 billion last year. That’s quite few investors 'voting' with their dollars.
Simon O'Connor, who as head of the RIAA, has a vested interest in putting a positive spin on this investment trend.
But the empirical evidence bears him out when he says investors are increasingly attracted to ethical investing by either adopting a positive screen to include exposure to certain types of equities (eg, green energy) or a negative screen to exclude other types of equities (eg, coal companies).
Ethical investing, however, is becoming far more sophisticated than saying yea or nay to certain stocks.
It’s seeing investors, both retail and institutional, actually acquire stocks in certain companies so they can attend shareholder meetings and ask pertinent questions about how companies operate through the prism of ESG principles.
In recent years, there has been no better example of this practice than the banks and institutions that came under shareholder pressure for lending or investing in the Tasmanian forestry products business Gunns, which became a corporate pariah because of its felling of old growth forests.
For green activists, it was an integral part of the strategy to end the felling of these forests.
What this reflects, of course, is a desire by investors is see their day-to-day concerns about social, political or environmental issues reflected in their investment decisions. It’s hardly surprising, really.
If I feel strongly about climate change then I’m hardly likely to want to invest in coal companies.
It’s not just climate change, although the intensity of the public debate around this issue has heightened awareness of investing according to ESG principles. Another big-ticket item is food production where investors want to see sustainable farming and food production practices reflected in their investments.
In the early years after the introduction of compulsory superannuation in 1992, the fledgling industry funds were anxious to stress their focus on maximising members’ returns; any ethical dimension to investing was downplayed.
They had joined the ranks of capital and wanted to be seen as responsible players.
But nearly 25 years later, these fledgling funds have become a $450 billion gorilla. Although still emphasising that returns are paramount, they are far more inclined to give their investment decisions an ethical flavour – and fund managers have responded.
If these decisions were costing their members serious retirement dollars it would be safe to assume it would spark a keen public debate. So the fact this hasn’t happened to any discernible degree would suggest that ethically based investing does not involve a performance trade-off.
In fact, according to the RIAA, responsible Australian equity funds and responsible balanced funds have outperformed their relevant benchmarks over one, three, five and 10 years.
Now, that’s what I call having your cake and eating it too.
George Lucas, managing director, Instreet