Sustainable investing isn’t new and is becoming more mainstream. From climate change to gender diversity, more people are aligning their money with their values.
In 2021, Australia’s sustainable investment market increased 20 per cent to a record $1.5 trillion. The Responsible Investment Association Australasia (RIAA) 2022 benchmark report found sustainable investments represents 43 per cent of total professionally-managed funds.
In addition to traditional shares and fixed interest sustainable investments offer a wide range of assets, including property, alternatives such as forestry, infrastructure, private equity and cash.
Most big super funds offer a sustainable investment option and some offer this as their default option. You can also buy sustainable managed funds, including a growing list of exchange-traded funds (ETFs).
What are sustainable investments?
Focus on people and planet
Sustainable investing is also known as ethical, responsible and ESG (environmental, social, governance) investing, with the focus on people, society and/or the environment.
Sustainable investments are selected using a variety of screening methods, including:
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Positive screening selects the best investments in their class
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Negative screening excludes harmful sectors, companies or activities such as arms, gambling, animal testing, tobacco and fossil fuels
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Norms-based investing screens for minimum standards of relevant business practices
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Impact investing has the explicit intention of generating positive social or environment impacts.i
The term ESG investing is used when a fund or company commits to sustainable investing in these three areas:
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Environmental – air and water pollution, biodiversity and climate change
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Social – child labour and labour standards, ethical product sourcing, gambling and human rights
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Governance – board diversity, corruption, business ethics, corporate culture and whistle-blower schemes.
The report found gender diversity and women’s empowerment are also gaining popularity.
Sustainable investing is not all warm and fuzzy. Performance still matters.
Performance gains
Initially, sustainable investing often came at the expense of returns but that is no longer necessarily the case.
The report compared the performance of what it terms responsible investment funds and mainstream investments funds (on average and net of fees) over the past 10 years to December 2021.
Responsible multi-sector growth funds consistently outperformed mainstream funds and their benchmark over 1, 3, 5 and 10 years. Responsible Australian share funds generally outperformed or were on par with mainstream funds. Only responsible international share funds disappointed, underperforming mainstream funds across all timeframes.
Watch out for greenwashing
Increased demand for sustainable investments has led to a rapid increase in the number of products available. The rush to cash in on the trend has sometimes led to what is known as ‘’greenwashing”. The Australian Securities and Investments Commission (ASIC) describes greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.
ASIC warns investors to review the product terms. For example, a fund might describe itself as ‘’no gambling” but may invest in companies that earn less than 30 per cent of revenue from gambling. Look for a clear explanation of how the product will achieve its aims and don’t rely on vague language like “considers”, “integrates” or “takes into account”.
Australian companies lifting their game
It’s not just super funds and managed funds taking sustainable investing more seriously, Australian listed companies are also adapting to changing investor preferences and regulatory environment. A recent analysis of ESG reporting by Australia’s top 200 listed companies, PwC found a 13 per cent increase in companies declaring a commitment to net zero emissions. However, only 55 per cent of those disclosed a transition plan or activities that will enable them to reach net zero.
There was also a 10 per cent increase in companies disclosing climate risks and opportunities, and a 30 per cent increase in companies disclosing a gender diversity policy.
For investors seeking sustainability along with financial returns from their investments, momentum and choice is growing. So please get in touch if you would like to discuss your investment options.
