Ethical and responsible investing is a growing area of interest, and not just because you can help save the environment further aches and pains, reduce munitions trading to militia in unknown lands, or suffocate tobacco companies.
In fact the main reason responsible investing is becoming more popular is because the outcomes are often, if not on par with, surpassing ordinary investment outcomes. After the GFC, closer attention was paid to those areas of the market that seemed to survive, with one in particular being Islam-based Shariah-compliant investments, for example, which made it out the other side relatively unscathed.
It’s now becoming the norm for individuals – and the companies they run – to take a more strategic stance on issues like climate change and human rights abuses. The burning of coal, support of tobacco, and the distribution of weapons don’t make for pleasant investment chats, since the outcomes of these investments are nothing good - explaining that your investment dollars are supporting spurious activities is now more of a reality as stocks are more accessible than ever. Superannuation developments mean we can actually see precisely what our money is supporting, and sometimes it ain't pretty.
Personal responsibility for the distribution of our money is becoming increasingly important as these options are made available to us as investors. Demand in on the up for investments that not only make good money, but don’t cause damage to someone or something.
With several recent reports being produced in Australia covering ethical investing practices and their outcomes, so the Responsible Investment Benchmark Report for this year discusses the sector in some detail. The Responsible Investment Association Australasia (RIAA) represents ethical investing across Australia and New Zealand, with over 150 members, with some valuable insights into the industry.
Key findings in the report include:
- The total assets under management in responsible investment strategies increased to over half of Australian total assets under management (TAUM) - $629.5 billion AUM as at 31 December 2014.
- Those investments that are managed under a core responsible investment strategy (‘ethical’ or ‘socially responsible investments (SRIs)’) rose once again by 24 per cent, now sitting at $31.6 billion AUM. The previous year’s increase was significant, with a 50 per cent rise.
- Investments that were subject to environmental, social and governance (ESG) integration represent $597.9 billion AUM, reflecting shifts by large fund managers.
The strong uptake of responsible investing in Australia has been attributed to four drivers:
- More and more companies are being found to have poorly managed ESG and ethical issues that impact shareholder value.
- Consumers are increasingly demanding investment options that are congruent with their personal values and beliefs.
- Activist and civil society activity and engagement with investment companies and the finance sector as a whole has increased awareness and facilitates change within companies.
- Fund managers and other fiduciaries are becoming increasingly aware that considering ESG issues is an important part of their responsibilities. Ignorance in the face of such extensive research into climate, environment and social practices doesn’t bode well for the future of companies who choose to ignore it, and this could very quickly be held against a company with poor investment performance.
There is also no denying that responsible investing pays. There used to be this idea that responsible investing was for saps and financially a dud, but the evidence is clear, the report states unequivocally: "the responsible investment approach is entirely consistent with good investment outcomes". The report also states that there is in fact a very compelling case for investing responsibly – the concept of doing no harm is becoming one that investors want to abide by, with investment value linked to ESG factors.
- Core responsible investment Australian equities funds very strongly outperformed the ASX300 and the average large cap Australian equities in all time periods across 1, 3, 5 and 10 years.
- Core responsible investments in international equities had strong results, and outperformed the average large cap international equities fund over 1, 3 and 5 years, but somewhat underperformed across 10 years. It is important to note that mainstream and responsible funds also under-performed the MSCI World ex-Australia Index over 5 and 10 years.
- Core responsible multi-sector growth funds (balanced funds) outperformed their mainstream equivalents across all time periods of 1, 3, 5 and 10 years.