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Ethical investing hits “inflection point”

The growth of ethical investing, locally and globally, shows no signs of slowing down as the knowledge that there is no financial penalty – rather benefits – becomes well understood.

The ethical investment industry has hit a critical mass and is rapidly gaining market share, a media briefing hosted by exchange-traded fund (ETF) provider BetaShares heard on Wednesday.

Heading the event were BetaShares chief executive Alex Vynokur, Morgan Stanley head of wealth management research Nathan Lim (formerly of Australian Ethical) and Future Super chair Mark Woodall.

Mr Lim said in Australia “core” responsibly invested assets (including deep green investments that apply screening, sustainability-themed investment and impact/community investing) hit $64.9 billion in 2016, and were rapidly gaining market share (currently at five per cent), growing by 26 per cent in just one year.

Between 2006-12, the growth rate had been on average three per cent, but since then “something has clicked”.

“The industry has hit a critical mass. It’s here, it’s happening and it’s growing,” Mr Lim told the audience.

Perhaps it’s the knowledge that sustainable investment strategies regularly perform in line with or better than their traditional counterparts.

Mr Lim pointed to research conducted by the US-based Morgan Stanley Institute for Sustainable Investing, which found that, compared with traditional funds, sustainable equity strategies either met or exceeded median returns and met or fell below median levels of volatility 64 per cent of the time over a seven-year period.

“In other words, in the majority of cases, investing in ethical funds provided the same or better return as a standard fund with the same or lower risk.”

The same holds true for Australia.

“If we compare the average returns of the funds investing in Australian equities using an ESG component against the returns of the broader market, we see that at the end of 2016 the former outperformed the latter for the past three, five and 10 years,” Mr Lim said.

“Investment in a manner that is consistent with your values does not come at a penalty.”

How green is green?

What constitutes an ethical investment is a point of contention, however. While “core” responsible investments stood at $64.9 billion in 2016, a broader interpretation that includes assets that have some level of ESG integration sees the figure stand at $622 billion.

Future Super’s Mark Woodall said some “light green” products were still investing in questionable companies. He gave an example of a product labelled “ethical” (which exists but he did not name) that provided negative screening to tobacco and controversial weapons, though applied no other screens. It still held shares in Amcor, which is one of the world’s largest tobacco packing companies.

Another applied an ethical screen that “may exclude companies which have a material exposure to the production or combustion of the most carbon-intensive fossil fuels” though still held shares in Woodside, banks that finance fossil fuels, Wesfarmers and Santos.

“Where screens are so light that they still include large fossil fuel and energy intensive companies, you have to ask whether they are truly ethical,” Mr Woodall said.

“If you really peel back the layers of that [responsible investment] onion, it is very light green… it’s not really cutting the mustard.”

He said an important conversation was about products being “true to label”, and that this was of increasing importance to millennial investors, who were a huge market for responsible investment.

Millennials will look under the hood: when you say no to coal you should mean no to coal

“Transparency is critical to them… They are savvy; they will look under the hood. They do want true to label. When you say no coal, you should mean no coal.”

The danger for funds was when a millennial finds out that their money isn’t being put into ethical pursuits, they won’t lobby the fund to change. They’ll engage their social networks and lobby them to leave.

“We see that consumers, particularly millennials, are rightly distrustful of the mainstream funds management industry,” Mr Woodall said. However, there is hope as more authentic and transparent products are being created.”

BetaShares launches FAIR

An example of an ethical product with a strict screening process is BetaShares’ new ETF product – the Australian Sustainability Leaders ETF (FAIR) – launched in December 2017 and which provides exposure to a portfolio of Australian companies that have made it through the fund’s negative and positive screens.

Aside from the typical negative ESG screens such as no fossil fuels, gambling, tobacco, armaments and animal cruelty (direct and indirect), it’s also the first fund to exclude companies that don’t have any female representation at the board level.

“It was critical for us to develop something with broad eligibility criteria,” Mr Vynokur said. “For example, while environment concerns remain core to the screens we use, we added a substantial number of other filtering criteria to FAIR, including the need for gender diversity at a board level and ensuring that businesses were not involved in activities like gambling, payday lending or selling tobacco, to name a few.”

Because of the screens, FAIR does not invest in any of the big four banks, or any Australian mining company.

After removing companies that don’t meet the screening criteria, sustainability leaders are identified that derive more than 20 per cent of revenue from positive activities such as renewable energy, energy efficiency, water efficiency, recycling, waste remediation and re-use of materials, public transport and green buildings. These companies are given precedence and a larger weighting.

Property is well represented in the companies included, with the likes of Mirvac, Stockland and Dexus featuring in FAIR’s portfolio, which since launching in December 2017 has already accumulated assets of over $65 million.

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