Whether you call it responsible or ethical, investing for the good of our society and environment is becoming a complex and competitive space for financial planners to navigate. Miriam DeLacy reports.

Ethical investing is certainly nothing new to many financial planners. Michelle Brisbane CFP^® and Trevor Thomas CFP^® both lead practices that have specialised in delivering ethical strategies for wealth management for over three decades. In that time, there’s been growing demand for financial products that offer clients options to align their investments with their values and direct their capital into companies operating in an ethical or sustainable manner.

Michelle joined Ethical Investment Services in 1999. In the 20 years since then, her team has grown from just three to double digits to meet the growing demand for ethical investment solutions. “We used to have this eco warrior identity within the profession,” says Michelle. “But now we’re seeing many other planners starting to understand the landscape and why it’s important to address the sustainable and ethical values clients want to see reflected in their investment choices.

“Making clients feel comfortable with how their money is being put to work is part of our role. And for our clients, that’s always involved constructing a portfolio that matches their personal concerns about the future of our world. Today, we see very strong interest in environmentally positive outcomes but clients will often want to make sure they’re not doing social harm with their investments, while others are more concerned with animal welfare and human rights.”

Recent research from the Responsible Investment Association Australia (RIAA) shows this expectation of a responsible approach to investing is almost universal among consumers. In their From Values to Riches 2020 report RIAA found that 89 per cent of Australians feel it’s important that their financial institution invests responsibly and ethically across the board while nine in 10 Australians believe it’s important that their financial planner provides responsible or ethical options.

For Trevor Thomas, meeting with Ethinvest Clients is about engaging with a wide spectrum of interests on the issues affecting the world today. “Every client is different, both in their concerns and how much detail they expect on what’s in their portfolio and what that means for avoiding harm and doing good,” says Trevor. “They will expect you to know at least as much as they do, or show willing to find out on their behalf.

“When clients ask if gas is a transition fuel or a serious environmental threat, you don’t need to have an answer or opinion at the ready. But these clients have a high level of integrity so it’s important to be engaged and committed to giving them the assurance that how they invest their money is commensurate with what they do in the rest of their lives.”

Name: Michelle Brisbane CFP^®

Position: Financial Planner, CEO

Practice: Ethical Investment Services

Established: 1988

Name: Trevor Thomas CFP^®

Position: Financial Planner, Managing Director

Practice: Ethinvest

Established: 1989

Changing attitudes and solutions

In the early days, both Trevor and Michelle had no choice but to offer this kind of assurance by investing in direct share portfolios. A move towards more standard, off-the-shelf investment solutions has only been possible in the last decade. “To give clients the transparency they expected in where their money is invested we used to offer a bespoke service through our direct share portfolios, based on a specialist investment model,” says Michelle. “In 2012 we built this out into our own Separately Managed Account and that’s been operating very successfully ever since, beating the benchmark over the long term.

“Even in recent years, we’ve been confronted by this misconception that responsible investing comes with a sacrifice to performance. But we’ve seen that the mere fact that there is better governance and greater sustainability concerns as part of the overall management of the underlying investments means that the fund does perform well.”

Trevor agrees on the importance of busting this myth when showing Ethinvest clients how their investment performance stacks up asset class by asset class. “Our argument is that you don’t have to sacrifice returns to invest ethically,” he says. “We always compare our clients’ portfolios against the standard performance benchmark for Australian equities, international equities, fixed income etc. There’s no reason why a term deposit from a bank with an ethical screen should pay a lower interest rate than any traditional bank.”

There is now plenty of evidence available in the public domain to support a more positive view on ethical investment performance. In 2019, Morningstar reported 65% of sustainable funds had performed in the top half of their respective categories[1]. And in their

Benchmarking Impact report released in September 2020, RIAA found that 92% of surveyed investors say their impact investments are meeting or exceeding expectations.

With this compelling evidence of the financial rewards of responsible investing coupled with demand from clients, financial planners are definitely coming around to the idea. As a  product provider well established in the space, Australian Ethical are experiencing a big leap in demand from the financial advice profession. “We’ve been pushing quite hard in the adviser channel for the last three years and developing out the support for them because we knew that demand from their clients was growing,” says Leah Willis, Head of Client Relationships for Australian Ethical. “But it was very much clients leading the discussion.

“This year we’re seeing a tipping point and planners are now embracing ethical and responsible investing and coming to us to build model portfolios to meet that increasing demand. And this is, in part, due to the evidence base we now have that you don’t have to compromise on returns. But there now enough clients asking that planners need to have a solution at the ready when the ethical investing question comes up in conversation.”

Pros and cons of competition

Established back in 1986, Australian Ethical were among the earliest movers in ethical investing products. Today Leah and her team are seeing competition in this space reach new heights in response to peak demand from planners and their clients. While this creates far more choice and opportunity for investors, this proliferation of options brings far greater complexity to what a responsible approach to investing actually looks like.

“We regard responsible investing as a spectrum of considerations and applications and there isn’t really one clear definition of what responsible investing is,” says Leah. “There is certainly interest in Australia and globally in trying to define it. But that’s a tall order when you consider that it can include negative screening, positive screening, sustainability themed investments right through to impact investments.”

“What we’ve talked about in the market in the last few years is the shades of green that clients and planners can consider, from light green to deep green. We regard Environmental Social and Governance (ESG) as that top down, basic approach to responsible investing. Because of the depth and breadth of considerations we apply to our portfolios at Australian Ethical, we see ourselves as the deepest green.”

Since they were established in 1986, Australian Ethical have followed the same ethical charter that underpins their whole business philosophy and principles-based investment approach. “Our charter doesn’t tell us what to screen out,” says Leah. “Instead it’s about a more responsible way of investing for positive outcomes and to avoid harm. We apply the approach across three major pillars – people, planet and animals.

“With the broader ESG trend, we’ve seen super funds and investment managers starting to think about excluding tobacco, fossil fuels and controversial weapons. Whereas we go a lot deeper in terms of human rights and animal welfare and for climate issues we’re much broader in the sectors we look at and thresholds we apply. It’s not just exclusions, it’s balancing a positive, more sustainable approach with screening for harmful impacts.”

According to Trevor the ‘green washing’ approach taken by some investment managers on the spectrum can make the product selection process frustating for financial planners and their clients. “You can look at a list of ethical funds on a platform and what they screen out, expecting them to be the ideal match for your clients’ responsible investing goals,” says Trevor. “Then you ask for a list of all their holdings and you review the top ten, they don’t look quite as good as you’d hoped. And when see the rest you might find companies that your client would hate to own in their portfolio.”

“This can really put some clients off the whole enterprise. When they look under the bonnet of an ethical fund and see holdings that aren’t very different from a traditional one they think why bother? Some of these clients are already quite suspicious and cynical about investing and see the share market as being a bit like a casino. Presenting them with options like these which carry the ethical label can really reinforce those suspicions.”

Name: Leah Willis

Position: Client Relationships Manager

Company: Australian Ethical

Established: 1986

Name: Tom King

Position: Chief Investment Officer

Practice: Nanuk Asset Management

Established: 2009 

A focus on benefits to investors

To help financial planners narrow down responsible investing products on the basis of their ethical credentials, Trevor recommends starting with the Ethical Advisers Co-op ratings. “This is a rating page for all the major ethical funds to make sure the underlying investments are doing what the screens suggest they should be doing,” says Trevor. “You get a two-pager on the fund and why they’ve got that rating. It’s a really useful resource for financial planners that’s designed to cut through the green wash.”

One of the managed funds achieving a four out of five green leaves rating from the Ethical Adviser Co-op is the New World Fund from Nanuk Asset Management. As their Chief Investment Officer Tom King asserts, the company and their product haven’t actually been established on the basis of ethical goals. “When we set up the firm, and then the fund, we didn’t seek to allocate clients money towards saving the world,” says Tom. “What we did set out to do is capture attractive long-term investment opportunities in the wake of the Global Financial Crisis.”

“We believe that the global economy is unsustainable in it’s current form due to resource constraints and environmental impacts. Change will happen in the future, we don’t know when or how. It may be as a result of knee-jerk reactions to major climate events or it may be off the back of well-thought through policy decisions. But however it happens, we focus our active management approach on industries like food, energy and water because there are technologies and companies within those industries that are going to contribute to that change and benefit from it.”

In seeking to capture returns from this transition to an economic model that pursues sustainable goals for our resources and environment, Nanuk Asset Management have created a Fund that is ethical by default, rather than by design. “We didn’t position ourselves as an ethical product and we’re not unsuited to investment portfolios where there is no desire to for a sustainable strategy or outcomes,” says Tom. “But then we realised the Fund was attractive to investors looking for an ethical product and they wanted confidence that we will continue to avoid companies for the portfolio that wouldn’t sit well with their expectations. So we put in place an exclusions framework that’s got very low thresholds, many at zero.”

Looking beyond ESG

As Chief Investment Officer for a fund that is seen by the market as highly ethical even though it doesn’t have an ethical agenda, Tom is familiar with the confusion that can arise around responsible investment product labels and expected outcomes. He thinks the term ESG, in particular, has been widely misunderstood by investment professionals and consumers.

“ESG typically refers to ESG integration which is consideration of ESG risks and that’s something investment managers have been doing for a long time,” says Tom. “But recently it has turned into a buzzword. When we’re looking at how financial planners can better meet the needs of their clients around responsible investing, it has much more to do with sustainable and ethical investing approaches and little to do with ESG.”

However Tom is also seeing a  welcome shift towards more straightforward communication that should help financial planners get a clearer understanding of what’s on offer for clients looking for investments that match their values.  “The industry is in a state of transition at the moment away from generalisations about ESG and ethical investment and becoming much clearer about what the alternative approaches are to achieving non-financial investment outcomes,” he says.  

As well as some important changes in how ethical products are labelled and understood, positive and negative screens are also becoming more effective in delivering portfolios that ethically motivated clients can be proud to invest in. “There is more genuine screening of portfolios happening now,” says Trevor. “This is resulting in better quality offerings and many more of them. As a financial planner you can now blend portfolios across all asset classes, using a number of fund managers with long track records and good performance and screening. The market is maturing and there’s never been a better time to sit opposite a client who says they want ethical investing.”

A long-term theme

With the catastrophic bushfires in early 2020, followed by the COVID-19 pandemic, many Australians have been reconsidering their priorities when it comes to their society and environment. In Michelle’s view, this could see even more clients sitting down with their financial planners to have conversations about their values in the context of responsible investing. “The current climate has given people more of an opportunity to consider what’s important to them,” she says. “Sometimes that might mean looking at where their money is invested and whether it will help the world become a better place.”

Tom agrees with this idea that current events may compel more financial planning clients to make responsible investments choices. “A whole lot of clients after the bushfires would like to know their money is helping to build out low carbon grids around the world,” he says. “If you can do that while improving the diversification of the portfolio, and earning a return then that’s a win for their financial planning goals and their interest in averting future climate crises.”

In addition to a potential spike in client interest driven by the upheaval of 2020, there is a longer-term factor for financial planners to keep in mind when considering responsible investing as a key part of their value proposition. According to research from KPMG, millenials are twice as likely as older generations to want their super to be invested responsibly and 49% of millennial millionaires make their investments based on social factors[2].

“Responsible investing is a significant opportunity for advisers and not just in the current environment,” says Leah. “As intergenerational wealth transfer sees assets passed down to the next generation, financial planners need to align their offer to the values of these younger family members as they look for ethical and sustainable ways to invest that wealth.”

[1] https://www.morningstar.com/articles/973590/us-esg-funds-outperformed-conventional-funds-in-2019

[2] KPMG, The numbers that are changing the world report, 2019