Federation Financial Services has a strong focus on ethical investing. The business is passionate about helping its clients invest their money ethically. Dave Rae CFP® talks to Jayson Forrest about the practice’s vision, philosophy and approach to ethical investing.

Name: Dave Rae CFP^®

Position: Financial Planner

Practice: Federation Financial Services

Established: 2004

Licensee: FYG Planners

Financial planners: 2

No. of Staff: 4

In may come as a surprise to many advice businesses that the overwhelming majority of Australians now expect their savings (87 per cent) and superannuation (86 per cent) to be invested responsibly and ethically, with three in four people willing to consider shifting their banking and superannuation to an alternative provider that invests responsibly and ethically.

However, these key findings from the Responsible Investment Association Australasia (RIAA) – which advocates for responsible and sustainable investing in Australia and New Zealand – come as no surprise to Dave Rae CFP^®, who along with his colleague Michael Snape AFP^®, operate Federation Financial Services in the leafy Canberra suburb of Ainslie.

With only two practitioners, Federation Financial Services may only be a small boutique practice, but when it comes to ethical investing, it punches well above its weight.

However, this focus on ethical investing has only been recent, coinciding with Dave joining the business back in 2019. Dave brought with him a deep-seated interest in ethical investing, which took hold some six years ago, when two separate conversations with clients about sector exclusions, prompted him to think more deeply about ethical investing.

“As I began my research into ethical and sustainable investing, I found my personal and professional interest in this area growing. Things that I never thought about before with investing money, started to make more sense. It allowed me to connect the dots between a client’s money, what that money is actually invested in, and how that money is working on the client’s behalf.”

That was the genesis behind Dave’s interest in this style of investing, where he has become adept at investing client’s money ethically and sustainably, while ensuring that capital is aligned to his clients’ ethical values and preferences. And as a Director of the RIAA, as well as Chair of the RIAA’s Financial Adviser Forum, who better to guide clients through their ethical investing journey? He really does know a thing or two about ethical and sustainable investing.

The A-B-C of investing

In the short time Federation Financial Services has been offering ethical investing as part of its service offering, an impressive 75-80 per cent of clients have either shifted their portfolios entirely to ethical or have started down the path towards ethical investing. Dave cites the summer bushfires of 2019-20 as being the catalyst for many clients wanting to make ESG changes within their portfolios.

“Ethical investing is all abut investing for a better tomorrow,” says Dave. “It’s about directing capital to build a better, more sustainable future. It’s a style of investing that resonates with clients.”

But he adds that when it comes to Federation’s philosophy about ethical investing, particularly in relation to portfolio construction, it is careful to separate its views from those of clients.

“As a business, we have some fairly strong views around ethical and sustainable investing,” says Dave. “So, when we’re having conversations with clients, it’s important that we educate them without influencing their ethical views. By doing so, we can better understand our clients’ individual preferences and values when it comes to ethical investing.”

However, he concedes that the nomenclature widely used for responsible investing – which is often used as an umbrella term comprising of ESG (Environmental, Social and Governance), ethical, sustainable and impact investing – can be overwhelming for clients.

Federation Financial Services approaches this complexity by referring to these investment styles interchangeably – at least in the initial stage – when discussing them with clients. And while these different strategies are explained at a higher level, they are never described in a way that is confusing for clients.

In explaining these strategies to clients, the business uses the A-B-C framework that was devised by the Impact Management Project – a forum for building global consensus on measuring, managing and reporting impacts on sustainability. Under this framework, A stands for ‘Avoid harm’, B stands for ‘Benefit people and planet’ and C stands for ‘Contribute to solutions’.

Dave explains: “‘Avoid harm’ is about excluding the likes of tobacco and/or fossil fuels from portfolios; ‘Benefit people and planet’ is about avoiding harm, while being involved directly in activities, like healthcare, that has a benefit for society; and ‘Contribute to solutions’ refers to companies that operate to avoid harm, while contributing to a solution, like using renewable energy, that generates positive, measurable outcomes for people or the planet.

“This A-B-C framework really resonates with clients and is something they can easily remember. It simplifies all of these different investing strategies.”

Client motivation

According to Dave, the types of clients attracted to ethical investing crosses the generations, appealing to both younger and older clients alike. He reveals that the key motivator for clients to invest ethically is wanting to use their money for environmental and social good in a way that they have not done before.

And while climate-related issues remain top of the agenda for clients, other factors like tobacco, weapons and human rights abuses, all figure in client conversations. In fact, Dave says there is now a general expectation by clients that their money is not invested in companies harming the planet, involved in human rights abuses, or engaged in the tobacco and weapons sectors.

“When people donate their money, they are quite targeted in the causes they want to help. And when people spend their money, they may choose not to spend that money with a particular company because of its stance on an issue,” he says.

“For many clients, after making this connection between their giving and spending, they are beginning to realise they also have the power to decide where their money can make the most social good with their investments.”

But what about portfolio performance? Does this social and ethical connection mean clients need to sacrifice investment returns to invest ethically?

“Not at all,” he says. “Of course, as a financial planner, investment returns are still at the forefront of any client’s portfolio. We need to ensure that any recommendations made are in the client’s best interests. And while clients are focused on using their capital to do good, they still expect to make a decent return on their investments to finance their retirement and lifestyle goals.

“But investing ethically doesn’t mean you have to sacrifice investment returns. There are numerous studies, including from RIAA, confirming that ESG and sustainable investing can generate returns at least as good as a traditional portfolio, if not better.

“And in terms of fees, earlier this year, Rainmaker released research showing that ESG equities managed funds are actually cheaper than non-ESG equities managed funds. So, both the performance and fees side of ethical investing is stacking up now for investors.”

Portfolio construction

The first step in the process of building an ethical investment portfolio for clients at Federation Financial Services, is taking the time to understand the client’s values and preferences in relation to investing. This includes discussing a range of issues and topics with clients, which enable the advice team to gauge the appetite of client – both negative and positive – for particular investments and sectors.

The next step is to match a client’s values to a suitable portfolio, which won’t be detrimental to the client from a performance perspective. Dave concedes that this stage of the portfolio construction process may require some trade-offs by the client, “as there might not be a solution that perfectly matches what they are looking to achieve”.

When putting together a portfolio and deciding on the product mix, Dave turns to a resource provided by the RIAA that lists ethical and ESG certified products. These products have been approved by the RIAA as having implemented an investment style and process that systematically takes into account environmental, social, governance or ethical considerations.

“Knowing that these certified products and their investment process has been reliably verified by an external party, provides planners with considerable peace of mind, and removes a lot of doubt caused by ‘greenwashing’ within the market,” he says. “Greenwashing is a form of marketing spin in which companies deceptively try to persuade consumers that an organisation’s products, aims and policies are environmentally friendly.”

Managed funds are the preferred investment structure used at Federation, and although direct shares are not used within portfolios, Dave is beginning to see a more “activist approach” by clients with their investments. He reports that clients are increasingly expressing an interest in using their shareholder status to work with advocacy groups, like the Australasian Centre for Corporate Responsibility (ACCR) and Market Forces, on resolutions to hold companies accountable on environmental and social issues.

“I’m starting to see some clients wanting to buy a direct shareholding in a particular company, so they can be more active when voting on company resolutions. They see that as a tangible way they can effect real change.”

Don’t fake it

Having specialised in advising on ethical investing over the last six years, Dave reckons he has learnt a thing or two. Perhaps his most salient leaning has been: ‘Don’t let perfect be the enemy of good.’

“As planners, we always want to come up with the perfect solution for our clients. But that’s not always possible. ESG and ethical investing continues to evolve and change, which means you are often required to make trade offs with your investments in order to reach your goals. There are always areas of grey you need to navigate and contend with, particularly in terms of how deep a client wants to go with their screening of companies,” he says.

“So, it’s all about coming up with the best approach for clients that you can find today, and looking to improve on that over time.”

And what other advice does Dave have for advice businesses looking to go down the ethical investing path? He points to three key areas: education; know your client; and research.

“You can’t fake your way through ethical investing. There’s a lot to learn, so planners really need to educate themselves about it. The RIAA is a great place to start. It has a lot of resources and tools available to help planners. And fund managers also have plenty of information that can assist planners.”

Importantly, Dave recommends practitioners begin having conversations with their clients about this style of investing, and gauge whether it’s of interest to them. He also emphasis not to let your lack of understanding about ethical investing hold you back from having those conversations with clients.

“Don’t be afraid to admit that you don’t know everything. Openly acknowledge to clients that you are also on a learning journey, and while you might not have the answers for them now, you will have the answers after conducting the appropriate research.”

Finally, Dave emphasises the importance of doing your due diligence on the products you are considering using to avoid ‘greenwashing’.

“Another term that is starting to be used is ‘rainbow washing’, where funds are mapping their investments to the United Nations’ Sustainable Development Goals, of which there are 17. Increasingly, more funds are mapping to those sustainable development goals, which are a rainbow of colours. So, you need to ensure these funds are actually achieving real outcomes.”

There are a range of tools planners can use to help with their due diligence and research processes, including the RIAA’s certified product tool. There is also the Ethical Advisers’ Co-operative (EAC) – a membership of financial planners who predominantly provide ethical investment advice or who are transitioning to this style of advice – which rates funds that have an ethical or sustainability focus. These funds are considered to be making an effort to invest in more environmentally sustainable, ethical and socially responsible investments.

“And if you are really serious about ethical investing, you might want to consider the RIAA’s accredited Responsible Investment Certification Program for practitioners, which certifies that financial planners have reached the professional standard required to advise on responsible investing products and services,” Dave says.

“With more and more Australians demanding their money be invested responsibly and ethically, there’s been no better time to differentiate yourself and your service offering by stepping up to meet this demand.”

The Australian Sustainable Finance Initiative

The Australian Sustainable Finance Initiative (ASFI) was born out of industry discussions at the end of 2017, which focused on developing a sustainable and resilient economy – that prioritises human wellbeing, social equity and environmental protection – for Australia’s future prosperity.

In 2019, Dave Rae CFP^® was invited to join one of four working groups for ASFI, where the objectives were to develop a roadmap for realigning the Australian finance sector to support greater social, environmental and economic outcomes for the country. These working groups have recommended pathways, policies and frameworks to enable the financial services sector to contribute to the transition to a more resilient and sustainable economy, consistent with global goals, such as the United Nations’ Sustainable Development Goals and the Paris Agreement on climate change.

The roadmap, which was launched in 2020, delivered 37 recommendations, with input from over 140 participants, representing over 80 organisations across Australia’s financial system. The recommendations were predominantly centred on what the financial services sector could drive, rather than relying on the Government.

Three recommendations specific for the financial advice sector were:

1. Building education around ESG and sustainability. For example, this might include adding ESG and sustainability to the FASEA education requirements.
2. Enabling Australians to take their sustainability values and preferences into account when making financial decisions.
3. The development of sustainability labelling standards to make products and services clearer and more transparent for consumers to understand.

For more information, go to: sustainablefinance.org.au