Socially responsible investing (SRI), or sustainable investing, has emerged as a pragmatic and profitable investment framework in Australia. Perpetual has witnessed a growing interest in environmental, social and governance (ESG) factors from our clients, particularly how they can apply sustainable investing to their own portfolios, and the implications on returns.
SRI refers to investing that considers a company's 'responsible footprint' using measures such as industry classification, revenue generated from undesirable activities for example investments in weapons research and development, or the amount the company positively contributes to society. An investor will often screen investment options based on specific ESG factors and will focus on identifying long-term risks and capturing opportunities arising from sustainability trends.
From interest to action
Our recent research, 'What do you care about?', surveyed 3000 Australians and found a quarter of them (25%) are showing a strong preference to have responsible investments in their portfolio.
Globally, about a quarter (US$22.89 trillion) of total assets are being professionally managed under responsible investment strategies, according to 2016 research by the Global Sustainable Investment Alliance (GSIA). By comparison, 2018 research by Morgan Stanley revealed more than three-quarters (77%) of institutional asset owners feel they have a responsibility to address sustainability through their investments, demonstrating a gap between implementation and interest towards SRI.
The conversations our advisers are having with their clients also highlight a disconnect between interest in sustainable investing and implementing sustainable investment frameworks to evaluate investment opportunities.
When assessing investment options, there has been a long-held theory the inclusion of ESG factors is associated with lower returns, which is likely still contributing to the hesitation many professional wealth managers have when considering SRI. Further to this, there is a lack of meaningful data and investment tools to help investors identify the clear benefit of sustainable investing, and many wealth managers rely on data gained from in-house research.
This represents an opportunity for third-party financial data providers to offer tools and metrics to support advisers and their investors to measure the impact of their sustainable investments.
Low returns a myth
The idea investing responsibly or with a sustainability focus leads to lower returns is a myth. Sustainability is all about long-term thinking which often leads to better long-term returns for investors. Indeed, research conducted by Morgan Stanley has shown ESG funds are regularly beating their mainstream benchmarks.
Perpetual Private has been providing bespoke portfolio solutions to clients interested in responsible investing for quite some time. More recently, we developed a multi-asset class responsible investment portfolio and as further demonstration of our commitment to responsible investing, Perpetual Private became a signatory of the United Nations-supported Principles for Responsible Investment. Our duty to clients requires us to seek the best risk-adjusted returns by focusing on the quality and downside protection of possible investments which includes consideration of relevant ESG risks. Although only a couple of years old, the portfolio has delivered returns above its mainstream benchmark.
Sustainable investing has enabled investors to think more systematically about the risk of unexpected, costly issues arising from ESG factors that can hurt long-term returns and should be considered by almost any investor across multiple asset classes.
Make it work for you
When considering a new investment approach or framework, it is best practice to see a financial adviser who can help you understand how to assess any new factors when you are reviewing your investment options.
Establish what responsible and sustainable investing means to you and what ESG factors in a company are the most important to you or your organisation.
As part of our 'What do you care about?' study, we were able to identify some of the things Australians care about the most. For example, our research revealed 26% of Australian investors care a lot about global warming and 29% care a lot about nature. There are worthwhile investment options in sustainable infrastructure emerging in Australia as the nation strives to meet its Paris Agreement targets, and screening companies for environmental factors is a great place to begin to apply a sustainable investment framework to a portfolio.
It is worth noting, if any investor or organisation is looking to do social good through their investment, they should think about their approach to philanthropy and charity separately to their investment strategy. Investing to achieve specific moral outcomes alongside a return will have a different impact on your portfolio than a sustainable investment framework will and should be discussed with an adviser who has specific experience in philanthropy.
Sustainable investing is primarily about protecting your portfolio against ESG risk factors and finding opportunities in sustainability trends. In its simplest form, it explicitly analyses a different set of risks to traditional investing. Removing these risks from a portfolio provides opportunities to boost long-term performance whilst still allowing investors to achieve their desired moral or ethical outcomes.