In recent consumer research, the Responsible Investment Association Australasia (RIAA) has highlighted strong growth in demand for ethical products. RIAA CEO, Simon O’Connor shares insights on what’s driving this demand and why it’s important for financial planners to get to know the options in this space.
The FASEA Code of Ethics coming into play at the beginning of 2020 has accelerated an already rapidly growing awareness of responsible and ethical investment for many financial planners. For the first time, planners are formally required to proactively understand their clients’ broader, longer-term interests, and whether product recommendations should be limited to responsible or ethical investments.
For financial planners with their finger on the pulse, this is something they’ve been doing for some time, working to understand their clients’ sustainability and ethical preferences. And those who are listening to their clients are finding there’s an ever-increasing interest to invest in companies that are doing good and avoiding harm. But even more so, advisers are finding that to provide advice in a manner that not only delivers strong investment outcomes, but aligns with client values, underpins a strong client relationship over the long term.
The COVID-19 effect
The financial market turmoil during COVID-19 has resulted in people scrutinising their investments more than ever before. It’s highlighted that companies ignoring issues such as pollution, health and safety, or corruption and who fail to look after their employees or engage with local communities are unlikely to thrive and will take longer to recover. It has also laid to rest the idea that it is only what can be measured that matters, and begins to demonstrate the materiality of various important themes, including gender diversity, social license to operate and environmental stewardship. A strong body of research from the likes of BlackRock, AXA Investment Managers, MSCI and others has highlighted that companies managing their sustainability risks well, make better investments.
Responsible investing – a term that incorporates approaches such as environmental, social and governance (ESG) integration, ethical and impact investment – now constitutes a major focus of Australian investors, with $1.149 trillion of assets under management in Australia managed through responsible investment approaches, a number that has almost doubled in the last five years (and now represents 37% of Australia’s professionally managed assets). Responsible investment has now proven itself to be an important element of understanding the full value of investments, underpinning strong risk-adjusted investment returns.
RIAA’s latest Responsible Investment Benchmark Report released in September revealed that in 2019, Australian equities and multi-sector responsible investment funds outperformed mainstream funds over one, three, five and 10-year timeframes. International responsible investment share funds outperformed the average mainstream international share fund over every time horizon except one year. There is evidence this trend has persisted throughout the COVID-19 period, with many responsible and ethical funds having navigated this tumultuous market much more strongly than those ignoring this trend.
A strong preference for ethical investing
Growth in the market reflects the preferences of consumers – RIAA research from earlier this year revealed the overwhelming majority of Australians expect their savings (87 per cent) and their super (86 per cent) to be invested responsibly and ethically. Three quarters would consider moving their banking, super or other investments to another provider if they found out their current provider was investing in companies engaged in activities not consistent with their values.
But importantly for financial planners, nine in 10 Australians believe it is important that their financial adviser provides responsible or ethical options, and 86 percent believe it’s important that their financial planner asks them about their interests and values in relation to their investments.
These figures confirm what other studies have been telling us; people are increasingly looking beyond government to business to play a role in solving social and environmental challenges, and will use their purchasing power – including their investments – to vote for the world they want to see.
Meeting client interests
In order to properly consider the broader, long-term interests of clients as FASEA now requires, planners should be building in appropriate questions about ethical and sustainability preferences into meetings with every client. Consistent with the developing global norms, this increasingly requires an understanding of the ESG and ethical preferences of your client to deliver on this duty, as is now moving to be mandated for planners in Europe.
This demands deeper understanding from financial planners around the very different approaches investment managers take to responsible investing, in order to ensure the investment advice you offer clients is aligned with their own preferences.
ESG integration explicitly takes environmental, social and governance risks and opportunities into financial analysis and investment decisions. Negative and positive screening involve systematically excluding or including certain companies, sectors, countries or other issuers from a fund or portfolio based on activities considered less or more desirable. Corporate engagement and shareholder action (often used in combination with ESG integration) is another approach aimed at flexing that ownership muscle, to influence corporate behaviour through direct engagements or voting on shareholder resolutions. Impact investing refers to investments made with the explicit intention of generating positive social and/or environmental impact alongside a financial return, and measurement of this impact.
While ESG integration and negative screening are about avoiding harm and managing risk, corporate engagement and impact investing have a greater focus on driving tangible change and contributing to real world solutions. Clients will have differing degrees of expectations, and different objectives they are trying to achieve through their investments, so understanding this is key to adequately aligning investment recommendations with the long-term interests of clients as FASEA requires.
Demystifying responsible investment options
There is now growing momentum among leading financial planners to incorporate responsible investment solutions into their offerings, with an emergence of ESG model portfolios, responsible investment products on approved product lists and platforms, greater availability of ESG data at a company level, and deeper expertise being developed within leading firms to better serve the growing client demand.
But like anything, it’s important to look under the hood before choosing the investment product –responsible investment is not without its greenwashing challenges. As the industry grows and ever more investment managers adopt the label of ‘responsible investors’, the need for independent third-party verification of investment products has never been greater.
RIAA’s pioneering RI Certification Program has certified almost 200 investment products across investment styles and asset classes. Certification is granted to products implementing an investment style and process that systematically takes into account environmental, social, governance or ethical considerations to the highest standards, with leading practice levels of transparency, and an investment process that has been verified by an external party.
The good news is there are many tools to help you make sense of the vast array of information out there that may seem overwhelming. For financial planners researching the depth and breadth of responsible investment products, the online research tool responsiblereturns.com.au provides a quick way for planners to wrap their head around the myriad of responsible investment products in the marketplace and certified by RIAA. It offers a simple way to review and understand the diverse range of available products, and their differing approach to responsible investment, from impact to ethical and ESG.
RIAA’s Financial Adviser Guide outlines the steps to getting started with responsible investing, and unscrambles the jargon with consumer-ready information about RI to arm yourself for your first conversation with a client.
From managing sexual harassment claims to engaging meaningfully with communities around Indigenous cultural heritage, companies’ social licence to operate is on investors’ minds, and clients are increasingly wanting to unpack whether their money is contributing positively to the world they want to leave live in and leave behind.
The financial planners who will distinguish themselves are those who can invest their clients’ nest eggs in a manner that meets both their investment goals and aligns with their life purpose and values.
