Responsible investing has gained considerable awareness recently following substantial growth in the area. The Responsible Investment Association Australasia (RIAA) found that the key driver of growth has been investors looking to align their investment strategies with their personal values and beliefs [1].
In general; the largest financial assets held by the average household is their superannuation[2]. Therefore, it is not surprising that many investors who are seeking to invest in a responsible manner have been focusing on how their superannuation is being invested. The RIAA’s research into the top 50 largest superannuation funds found that the majority of these had some form of commitment to responsible investing (approximately 70%) [3].
Responsible investing considers environmental, social, governance (ESG) and ethical issues as part of the investment decision process. However, it is important to be mindful that responsible investing is indeed quite a broad term. The values and beliefs in these areas do vary from individual to individual; so it is important to consider the sub-categories of responsible investing. These include “Ethical Investing”, “Socially Responsible Investing (SRI)” and “Sustainable Investment”.
Ethical Investing is a values and/or morals based style of investing that excludes investments based on certain criteria. These are known as “negative screens” with the most common exclusions being weaponry, tobacco and gambling [4]. If you wish to invest ethically; it is important to check that the negative screens do both align with your values and beliefs, and accurately capture companies that you wish to exclude from your investment portfolio or superannuation.
SRI Investing incorporates the negative screens of ethical investing but also includes “positive screens”, which supports investing into companies that have a positive ESG impact. If you do wish to support certain companies or industries and are looking to use your wealth to support social change, this type of investing goes beyond ethical investing and may actually align better with your values and morals. For example – you may have a strong belief in renewable energy, and having a positive screen in this area may be quiet important to you.
Sustainable investing is the belief that investing in companies with superior ESG risk management will result in out-performance, although unlike ethical investing; financial performance is its primary consideration/motivator. Sustainable investing may not apply any negative or positive screens to investment decisions.
Most of the largest superannuation funds do have responsible investing policies that consider sustainable investing. Of these, many also offer investment options with negative and positive screens. However, in all cases it is important to check whether the risk level of these options do still align with your individual risk tolerance and goals. Dedicated responsible investing options may have very high allocations to growth investments. Therefore, it is possible that allocating your superannuation to a single pre-mixed responsible investment option may result in a portfolio that has a risk level that is not in line with your tolerances, life stage, goals or objectives.
When considering responsible investments, many people are concerned about the impact of their portfolio’s investment performance on their accumulation of wealth, or on the funding of their retirement. The RIAA has identified performance concerns as the top detractor towards growth in responsible investing[5].
Many investors may be willing to accept lower expected returns through the adoption of a responsible investment approach; within reason – and depending on whether they can still generate a return to achieve their goals. Whilst past performance may not be a good indicator of future outcomes, it is interesting to note that historically; reduced investment performance from responsible investing has not been an issue.
The average responsible investment fund has actually outperformed the average manager in their respective investment class across most time periods to 31 December 2016 [6]. However, investors must be cautious when looking at these past results, as this includes a period where there was notably volatile performance coming from the mining sector (for which many responsible investment options may have negative screens) and where quality defensive companies have outperformed (which many responsible investment options have a natural skew towards).
Investment strategies that consider ESG risk issues may have a more robust investment process, as they are conducting more in-depth research in making investment decisions – so this may not intrinsically impact performance negatively. However, ethical investment options that incorporate negative or positive screens may result in very different investment outcomes, as they can exclude entire sectors from a portfolio. Therefore, the performance expectations of a responsible investment portfolio will be highly influenced by how you want your values and beliefs to be incorporated into the investment decisions of your portfolio, and this can vary substantially from person to person.
If you are interested in investing your wealth in a more responsible manner please contact the Fortis Financial Planning team by calling 02 9267 0108 – or via email at info@exemplary-financial.flywheelsites.com. They can review your existing investments or superannuation fund and provide advice with consideration of your risk tolerance, situation, goals and ethical values.
[1] RIAA – Responsible-Investment-Benchmark-Report-Australia-2017
[2] ABS – Household Wealth and Wealth Distribution, Australia, 2011–12
[3] RIAA – Superfund Responsible Investment Benchmark Report 2016
[4] RIAA – Responsible-Investment-Benchmark-Report-Australia-2017
[5] RIAA – Superfund Responsible Investment Benchmark Report 2016
[6] Responsible-Investment-Benchmark-Report-Australia-2017
