The pandemic and global events have super charged its demand, with investors considering how a company approaches issues like climate change and human rights just as important as the money it makes.
Consumers’ expectations have changed so companies can no longer focus on just generating profit for shareholders. They are instead defined by how they respond to issues and events, and are compelled to create a more inclusive, sustainable and resilient operating environment.
A recent benchmark report by the Responsible Investment Association Australasia (RIAA) found the responsible investment market reached new highs in 2020, increasing from $983 billion in 2019 to $1,281 billion in 2020.
This exponential growth seems set to evolve even further as people gain a better understanding of environmental, social and governance (ESG) factors, alongside the growing understanding that ESG principles can drive better long-term returns.
Sustainable investing isn’t a separate asset class. Typically, sustainable investing is an umbrella term under which various strategies sit.
In general, sustainable investing assesses the long-term value of a company or asset, based on financial and non-financial factors (across ESG practices). Whereas ethical investing seeks to avoid investments that have a negative impact on society or the environment. ESG investing is inclusive and integrative, striving to identify good companies who are applying business best practice for their industry. Unlike negative screening, it takes a positive focus on companies to find those less likely to face fines, lawsuits, and reputational damage1.
More recently, impact investing has also risen in popularity. It challenges the view that social and environmental issues should be addressed by philanthropic activity, and that investments should concentrate solely on achieving financial returns. Instead, it offers investors the chance to use their capital for good, by investing in a range of opportunities to develop social and environmental solutions through investments that also generate financial returns.
One of the previous objections to sustainable investments was a concern over performance. But in 2020, responsible investment funds performed on par with, or better than, the market, even though overall fund performance was down largely due to the impact of COVID-19 on global economies.
|Multi-sector growth funds||1 Year||3 Years||5 Years||10 Years|
|Responsible investment fund average - multi-sector growth funds*||7.2%1||7.4%1||7.9%1||8.2%1|
|Morningstar category: Australia fund multi-sector growth**||2.9%||5.3%||6.4%||6.9%|
|International share funds||1 Year||3 years||5 Years||10 Years|
|Responsible investment fund average - international share funds*||8.3%1||11.0%1||11.%1||10.1%3|
|Morningstar category: Equity World Large Blend**||5.7%||9.5%||9.8%||11.7%|
|Australian share funds||1 Year||3 years||5 Years||10 Years|
|Responsible investment fund average - Aus/NZ share funds*||1.7%2||5.3%2||7.4%2||8.1%1|
|Morningstar category: Australia Fund Equity Australia Large Blend**||1.7%||5.5%||7.5%||7.0%|
|Responsible investment fund average - Aus/NZ share funds*||1.7%2||5.3%3||7.4%3||8.1%2|
|S&P/ASX 300 total return||1.7%||6.9%||8.8%||7.8%|
1 Average responsible investment fund outperformed (+1%)
2 Average responsible investment fund on-par with market (+/- 1%)
3 Average responsible investment fund underperformed (-1%)
Note: Average performance of responsible investment funds was determined using the asset weighted returns (net of fees) reported by survey respondents over one-, three-, five- and ten-year time horizons and compared to the mainstream fund performance from Morningstar DirectTM
* Data provided by survey respondents
** Data provided by Morningstar directTM
Source: Responsible Investment Association of Australasia, Annual Benchmark Report, 2021. Investors lead the way
Rapid developments across countries, regions and markets are resetting expectations of responsible investment. New standards and regulations are moving the industry towards the best standards of practice that contribute measurably to a more sustainable world.
The next challenge for the maturing Australian responsible investment market is to improve the monitoring and reporting of sustainability outcomes.
Millennials have driven much of the interest amongst retail investors and younger Australians continue to say they would save or invest more if they knew their money would make a positive difference2. They are likely to crave information about their investments and the underlying impacts because they recognise they’ll probably live long enough to experience the ramifications of their actions.
At BT, we believe a sustainable investment approach is fundamental to providing long-term value for investors. Over the long term, appropriate consideration of ESG factors in the investment process can help drive better financial outcomes and positively influence risk-adjusted returns.
You can find ESG investment options across all asset classes and investment styles, from Australian and international shares to ETFs and fixed interest funds.
Depending on your needs, you could choose to invest fully in sustainable investment options, or you might prefer to make a small proportion of your overall investments into a thematic, sustainability fund or impact investment instead.
To help meet the increasing interest in sustainable investment, we also expanded the list of sustainable investments available through BT Panorama by almost 10 per cent in the first half of 2021.