Younger investors lead demand for responsible investing

Photo of David Macri, Australian Ethical Investment By David Macri, Australian Ethical Investment

min read

David Macri of Australian Ethical (pictured) considers actively managed funds for ethical investing. VanEck’s Arian Neiron shows how ETFs can be used.

The benefits of ethical investing are no longer simply about feeling good by doing good. Investors are increasingly catching on to the attractive returns and lower risks. 

The expectations that investors are placing on the financial services industry are changing. A growing number of people, from retail through to institutional investors, are asking for a responsible and ethical approach to how their money is managed that is consistent with what is important in their own lives.

The industry is responding with more than one in every two dollars of professionally managed assets now invested through some form of responsible investment strategy (which includes Environmental, Social Governance (ESG) integration).

Core responsible investments (which include sector screening) now represent 12 per cent of total assets after growing strongly over recent years. It is this latter form of responsible investing that offers most of the benefits discussed below.

To date, many of the benefits have focused on knowing that you are not profiting from unethical behaviour or from businesses that are causing unnecessary harm to the environment, society or animals. For example, no gains are made from industries such as tobacco, gambling or fossil fuels.

For many investors, the benefits also include taking a stand, by withholding investment dollars from businesses that are not acting responsibly. In doing so, they are making an active decision to direct capital away from unethical sectors and companies, and towards those that have a positive impact.

If every investor took an ethical approach to selecting investments, the world would be a better place, and it would be nice if our legacy was not just a big inheritance but a better planet and society to live in.

While ethical investing may help people sleep better at night, this rising demand for sustainable investments also reflects superior investment risk-and-return outcomes. At Australian Ethical, this has certainly been our experience.

For example, Australian Ethical’s flagship Australian Shares Fund has delivered 10.7 per cent per annum (after retail fees) over 10 years to 31 May 2019, compared with the S&P/ASX 300 Accumulation Index return of 9.9 per cent, with lower risk (as measured by standard deviation of monthly returns of 10.5 per cent versus 11.8 per cent).

Over the history of the fund we have developed expertise in certain sectors that pass our ethical screens, such as healthcare, IT, biotechnology, utilities and telecommunications, with much of the alpha coming from superior stock selection in the small-cap segment within these sectors.

Despite exposure to the more volatile small caps, the overall portfolio has demonstrated lower volatility compared to the overall market, or indeed compared to most equity funds.

An additional benefit is the relatively low correlation with other funds, which makes it a perfect fit in any portfolio (not just ethical ones) because it increases the diversification benefits and reduces overall portfolio volatility while improving returns.

We also apply our ethical criteria to fixed interest, property, infrastructure, venture capital and private equity, to allow our investors to invest ethically across the whole risk spectrum.

So, while people may debate the benefits, what is no longer up for debate is that superior investment performance and ethical investment are not mutually exclusive.

Arian Neiron, VanEck

Suitable or responsible investing is becoming increasingly popular, often led by younger investors who are socially aware and have little tolerance for companies acting unethically or harming the environment. 

Evidence is also mounting that incorporating environmental, social and governance (ESG) considerations into a portfolio can improve returns and is fast becoming the norm.

According to the Responsible Investment Benchmark Report 2018 from the Responsible Investment Association Australasia (RIAA), $866 billion of assets under management, or 55.5 per cent of all assets professionally managed in Australia in 2017, were responsibly managed.  Asset managers using ESG considerations accounted for most total assets under management.

RIAA found that core responsible investment Australian share funds outperformed the average large-cap fund over three, five and 10 years.

Outside Australia, research from academics, asset managers and index providers has found a link between good ESG and improved financial performance, largely through risk reduction.

UBS Wealth Management’s Global Chief Investment Officer, Mark Haefele, recently said: “Over 2,200 academic studies undertaken in the past 40 years have examined the relationship between ESG factors and corporate financial performance. More than 90 per cent of them have found that ESG factors have a positive or neutral impact on financial returns.”

Exchange-traded funds (ETFs) have greatly expanded options for investors in ethical investors. While sustainable or ethical managed funds have been available to Australian investors for some time, research house Rice Warner has previously stated that some Australian ethical managed funds charge “exorbitant fees.”

In contrast, ETFs can help investors avoid high management costs while allowing them to access a portfolio of sustainable securities in a single trade on ASX.

The provision of ESG company ratings and indices by respected research providers is an additional key positive for Australian investors because it simplifies the selection of appropriate ETFs and managed funds.
MSCI is the world’s largest provider of ESG indices across both equities and fixed income with more than US$170 billion benchmarked to MSCI ESG indices. MSCI has a team of more than 170 analysts worldwide assessing all stocks in its global universe on a AAA to CCC scale, according to their exposure to industry-specific ESG risks and their ability to manage them relative to their peers.

Recently and for a fourth year running, MSCI was voted Best Firm for Socially Responsible Investment Research, Best Firm for Corporate Governance Research and Best Firm for Sustainability Indices and Benchmarks in the Independent Research in Responsible Investment (IRRI) Survey.   The survey was completed by 954 analysts, portfolio managers and companies from 44 countries.

VanEck has partnered with MSCI to create state-of-the-art indices that uses MSCI’s ESG capability. 

VanEck’s MSCI International Sustainable Equity ETF (ASX: ESGI) has been certified as an ethical investment product by RIAA. ESGI tracks the MSCI World ex-Australia ex-Fossil Fuel Select SRI and Low Carbon Capped Index and provides investors with access to a portfolio of around 174 true-to-label sustainable international companies.

The VanEck Vectors MSCI Australian Sustainable Equity ETF (ASX: GRNV) is an Australian equities portfolio encompassing a combination of values-based and ESG investing.

Like ESGI, it screens companies based on a broad range of exclusions, controversies and inclusions based on business activities and MSCI’s ESG framework. GRNV tracks the MSCI Australia IMI Select SRI Screened Index.

Both ETFs enable investors to more easily and affordably access a portfolio of truly sustainable international companies in one trade on ASX.

About the author

David Macri is Chief Investment Officer at Australian Ethical Investment, a leading specialist fund manager in ethical investing.

Arian Neiron is Managing Director - Head of Asia Pacific, VanEck – an ETF issuer.

From ASX

If you have overlooked ETFs because you do not understand them, or because they did not offer you the exposure you were looking for at the time, now might be a good time to review the ASX online course on ETFs. The course is free, and no registration is required.

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