Sustainability is the new norm
Sustainable investing is becoming less of a thematic investment characteristic and more a ticket to play. You only have to look at the number of companies recently committing to net zero targets to see a shift in the corporate norm towards a more responsible way of operating. It goes beyond reporting operational environmental, social, governance (ESG) metrics and targets. Companies are increasingly highlighting sustainability initiatives driving near and long-term business value.
As consumers demand more from companies they financially support, employees align their values with the companies they work for and shareholders focus on the triple bottom line (people, planet, profit). A sustainable ethos is no longer a nice-to-have, but a competitive no-brainer.
According to a recent benchmark report by the Responsible Investment Association of Australasia (RIAA), “responsible investments now make up 40% of Australia’s total managed funds, up from 31% the year prior”. This means responsible investment has a record $1.28 trillion funds under management.
A sound indicator sustainability isn’t just for the cool kids, even the big four accounting firms are now getting on board. It’s similar to when parents started creating their own Instagram accounts – we knew it wasn’t just a trend.
This corporate behaviour is in stark contrast to the Gordon Gecko-esque ‘greed is good’ mantra of the late 80s. It is hard to argue with the moral high ground, companies and their boards risk backlash and even obsolescence if they don’t move with the sustainability tide.
Related article: Ethical Investing in Australia – a guide to getting started.
Does getting ‘woke’ mean going broke?
Those who still echo this sentiment are simply out of touch. Another emerging theme we are seeing is the repeated debunking of this myth: you can’t achieve financial performance while ‘doing good’. There is increasingly mounting evidence pointing to the fact sustainability leads to value creation.
A recent white paper by Morgan Stanley looked at nearly 11,000 mutual funds from 2004 to 2018, it found there is no financial trade-off in the returns of sustainable funds compared to traditional funds. If anything, they demonstrated lower downside risk (the potential risk of loss) A myriad of studies have also debunked the long-held, stereotypical view of investing responsibly equals sacrificing investment returns.
The RIAA found COVID-19 has further exacerbated this trend.
“The body of evidence continues to stack up – nationally and globally – showing that responsible investments typically achieve stronger risk-adjusted financial performance than their peers, consistently outperforming against benchmarks over short-term and long-term time frames.”
Increasingly, managed funds seek to capitalise on these trends. The Nanuk New World Fund management team believes the tension between economic growth and environmental sustainability is resulting in long-term structural changes in many industries, and that these changes provide investment opportunities.
Top performing ESG fund AtlasTrend Clean Disruption Fund invests in clean disruption of energy in areas such as storage, transportation, infrastructure, manufacturing, building materials, lighting, recycling and waste management.
Portfolio manager Kevin Hua says “investing in positive structural changes in our world such as green energy is not a flavour-of-the-month exercise. We believe it’s the correct way to not only invest sustainably but also generate long-term returns for our investors.”
Net-positive force for change
In the spirit of continuous improvement, another emerging theme in the sustainable investing space is: it’s not enough to just be ‘less bad – what we should aim for is being a net positive force for change. Many sustainable investments are quite often at the ‘avoiding harm’ end of the sustainability spectrum, simply achieved through exclusion of less desirable sectors via negative screening.
Now, investment managers are increasingly aiming to fall on the other end of the spectrum, which involves contributing to solutions. They do this by investing in companies with positive environmental and social impacts, or via impact investing. There are sustainable themed superannuation funds that seek to invest in companies that are net positive contributors to the 17 UN Sustainable Development Goals.
How to find green and sustainable investments
Those are some of the trends we’re seeing as investment managers. Now, let’s dive into how you can get in on the action:
1) Look out for greenwashing
Greenwashing is a form of deceptive, misleading marketing which attempts to make a company appear more environmentally friendly than it really is. In these days of woke marketing, it’s more important than ever to read between the lines. Don’t just look at the name of the fund, but go deeper to understand the strategy and what it is invested in.
Transparency is key. Head of Ethics at global fund manager Baillie Gifford says:
“(with the) absence of clear standards and widely agreed definitions, transparency is key, with evidence to back up the approach taken. That way, all investors can be clearer about what they are actually buying in to, and can then check that their managers are ‘walking the walk’.”
Tip: Look for transparency. A transparent fund manager (or super provider) should make their investment holdings (what they’re actually invested in) easy to find, accessible and clearly disclosed with as much detail as is available. If you want something more, ask! Chances are they have the information on hand.
2) Don’t forget your superpower
Arguably your biggest financial lever, and where you can have the biggest sustainability ‘impact’ is through your superannuation. It makes a lot of sense to align your investments with the future you want to live in and retire into.
There are many ethical-themed investment options out there but not all of them are created equal. The truth is, fund managers are still evolving their approaches to the responsible investment challenge, many are experimenting with the best way to do things.
A rise in the provision of third-party sustainability data providers is helpful, as are changes in regulation.
Fees and performance are important. Generally, lower fees are desirable since high costs can erode even the healthiest super balance over time. But fees are rarely ‘like-for-like’ and easy to compare, nor are they the only factor to consider when choosing a fund. If you weigh up fees and costs against the fund’s performance over time, it can help with choosing which super fund is right for you.
Tip: Look for measurement. Does the fund measure and report on its sustainability contribution? What metrics does it use? Is it improving over time? Make sure you understand these measures and know that they do not take away from the need to have a detailed understanding of individual companies.
3) Personal choice – values
When it comes to sustainable investing, there are a huge variety of ways you can ‘do good’ depending on what you are most passionate about.
If you are thinking about investing in a managed fund, there is a lot of choice. Various funds may place different emphasis on specific underlying issues, like farmland regeneration. Others might pay particular attention to environmental measures like carbon (cO2) intensity.
Funds like Social Ventures Australia use loans and equity investment to support social enterprises, Indigenous businesses and affordable accommodation. Unfortunately, it isn’t accessible to retail investors.
Tip: Taking ‘responsibility’ is inherently personal, and ultimately is whatever helps you sleep at night. Think about which sustainability themes speak to you and invest accordingly. There is no right or wrong here. If you can’t decide on one theme over another, consider investing in a fund that supports the 17 UN Sustainable Development Goals.
If something isn’t ethical, it’s probably not sustainable. It won’t last very long in an era where consumers, if not competitors, will call it out.
Both companies and fund managers are realising the benefits of sustainability, and there are many choices out there available for investors interested in sustainable investing.
Knowing what you believe in will help you narrow down your focus. Once you’ve found something, we encourage you to look into the underlying investments, as well as the investment philosophy and methodology to see if it is genuinely sustainable and not just greenwashing. And as always, don’t forget to balance fees with fund performance.
Cover image source: asharkyu/ Shutterstock.com
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