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The ‘sustainable’ way to invest

Sustainable investing is gaining traction, fast. It’s more than just a new trend, with 90% of people surveyed believing sustainable investing is important1.

Interestingly, Australia is leading the way. Of the $2.25 trillion invested in professionally managed assets, 44% is in responsible investments2. Most of this is attributed to institutional investors who have incorporated responsible investment principles into their investment processes. The Responsible Investment Association of Australasia (RIAA) defines responsible investment as an approach to investment that explicitly acknowledges the relevance to the investor of Environmental, Social and Governance (ESG) factors, and of the long-term health and stability of the market as a whole.

The latest research from RIAA released in March 20203 indicates two thirds of Australians they spoke to, who don't currently invest in ethical companies, funds or superannuation funds, will consider doing so in the next five years. But they don’t know how to get started.

This presents a huge opportunity within the financial advice and wealth management sector in Australia.

The power of belief

With 2020 shaping up to be a year like no other, it’s highlighted how societal wellbeing is intrinsically linked with business and the economy. And many Australians believe the finance sector has a role to play in generating positive social, environmental and economic outcomes for the country3.

Many investors also believe companies that apply corporate ESG practices tend to enjoy higher profitability and may therefore be better long-term investments4. No longer can companies focus on simply generating profit for shareholders. They will instead be defined by how they respond to issues and events, and be compelled to create a more inclusive, sustainable and resilient operating environment.

ESG integration and corporate engagement are currently the top strategies used by institutional investors in their portfolios2.

Chart showing composition of Australia RI market by primary and secondary strategy. ESG integration is the highest at 45% and impact and community investing is lowest at 1%.
The pie chart above shows the 'Composition of Australian RI market by primary and secondary strategy' it is seen highest in the composition is 'ESG integration' at 45%, 'Corporate engagement & shareholder action' is second highest at 36%, 'Negative screening' is 13%, 'Sustainability-themed investing' is only 4% and 'Positive screening' & 'Impact and community investing' are 1% which are lowest in the mix.

"Companies that apply corporate ESG practices tend to enjoy higher profitability and may therefore be better long-term investments."

The potential challenge facing financial advisers is how to better understand sustainable investing so they can confidently talk to their clients about the options available to them. 

The numbers tell the story

At BT, we believe a sustainable approach to investment provides long-term value for investors and by integrating ESG issues into our investment process, it may improve risk-adjusted returns.

Investors’ concerns over the performance of sustainable investments have reduced significantly since 2017. The latest RIAA research shows 67% of people surveyed now believe responsible banks perform better over the long term and 62% believe the same of superannuation funds3.

And sources show sustainable investments can and do outperform some traditional investments.

Table showing multi-sector growth fund in a period of 1 year, 3 years, 5 years and 10 years
The table above shows the growth of 'Multi-sector growth funds' in the period of 1 year, 3 years, 5 years and 10 years. We can see that Australian Fund Multisector Growth outperformed by the average RI fund in 1 year by -2.26%, 3 years at 4.39%, 5 years at 4.92% and 10 years at 7.02%.

Source: Responsible Investment Association of Australasia, Annual Benchmark Report, 2019

Investors lead the way

Investors are driving innovation in sustainable investing, in search of products and solutions tailored to their interests. They’re also keen to understand the environmental and social impact of their investments and digital disruption has made transparency the norm4

Unsurprisingly, it’s Millennials who are providing the most momentum3. They are likely to have an abundance of information and technology at their fingertips and be on top of issues happening globally. They are also 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.

To stay relevant and form strong relationships with this generation, advisers should consider developing a better understanding around sustainable investing strategies and how to apply them within a portfolio. 

"Investors are driving innovation in sustainable investing, in search of products and solutions tailored to their interests"

Barriers for investors

Despite the clear desire to get involved, many investors may still feel they need to choose between financial gains and sustainability due to the limited product choice and accessibility. But this is only a perception. Many of these barriers could be overcome through education and better understanding with the help of financial advisers. We’re already seeing this happen with investment performance – the trend now indicating responsible investing is viewed as a driver of stronger financial returns3.

Bar chart showing 'How significant are the barriers to including sustainable investing your portfolio'. It shows numbers in somewhat significant barrier and very significant barrier.
The bar chart above shows 'How significant are the following as barriers to including sustainable investing in your portfolio?' according to Morgan Stanley Institute for Sustainable Investing Report 2019. We can see that 'Concerns about investing performance' is a very significant barrier which 46% out of 79%, Lack of available financial products for my portfolio' is a very significant barrier, 'Time and effort required to understand sustainable investing' is a very significant barrier and 'Lack of financial advice' is a very significant barrier.

Source: Morgan Stanley Institute for Sustainable Investing Report 2019

Investors have indicated they think it’s important for financial advisers to ask about their interests and values in relation to investments3. So, we encourage financial advisers to research all the information available to them and help their clients make informed decisions about this approach to investment. 

Role of sustainable investments in a portfolio

When incorporating sustainable investments into a portfolio, the same principles apply to building any diversified portfolio.

Importantly though, you need to work with your clients to understand which causes matter to them. There’s unlikely to be a one size fits all approach, but you may see some common themes emerge, which may help you create suitable model portfolios. 

And it’s not just about the negative screening of companies or industries like weapons or tobacco. It’s also about investing in sustainable companies that are considering their business impacts and performance over the long term.

"Tools like ESG research on BT Panorama will help you understand a company’s exposure to ESG risk"

The key is finding the right tools to help you identify those companies or investments that operate in a way that’s positive for the environment and evidences the good governance and social standards your clients could be searching for. But we know it can be hard to access this information.

At BT, we’ve partnered with Morningstar and Sustainalytics to provide ESG research tools on our investment platform BT Panorama. They will help you understand an investment’s exposure to ESG risk and empower you to appropriately consider the sustainable approach of companies when making decisions about investments.

  • For ASX200 listed companies, Sustainalytics assesses a company’s performance across a range of material ESG issues along with its involvement in ESG-related controversies.
  • For managed funds, Morningstar assesses the holdings of a fund and applies an asset-weighted average of the ESG risk scores from Sustainalytics in relation to the underlying investments.

Each company and managed fund receives a score on a scale of 0 to 100, where 100 represents the highest exposure to unmanaged ESG risk and 0 indicates lowest exposure to ESG risk.

By bringing together our expert knowledge and first-class technology we’re able to support you through flexible product and service capabilities.

Taking positive steps

Investors are sending a strong signal to investment professionals and the industry that we need to catch up with their demand as they struggle to find alignment with their personal priorities3. If more investors use a sustainable strategy in their investment decision-making, more companies may be encouraged to behave sustainably and address ESG concerns and opportunities in their business.

It’s also a great way for advisers to engage with their clients around their investments. It’s topical, relevant and lends itself to longer-term investment horizons and strategies.

Find out more about BT Panorama and how it can drive efficiencies for your practice. 

 

1 BT Australian Financial Health Index, 2018
2 Responsible Investment Association of Australasia Benchmark Report 2019 https://responsibleinvestment.org/wp-content/uploads/2019/07/RIAA-RI-Benchmark-Report-Australia-2019-2.pdf
3 From Values to Riches 2020, Responsible Investment Association of Australasia https://responsibleinvestment.org/wp-content/uploads/2017/11/From-values-to-riches-Charting-consumer-attitudes-and-demand-for-responsible-investing-in-Australia-2017.pdf
4 Morgan Stanley Institute for Sustainable Investing Report 2019 https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf

Next: 5 ways to demonstrate value to your clients

ESG research tools on BT Panorama will help you understand an investment’s exposure to ESG risk and empower you to consider the sustainable approach of companies when making decisions about investments.

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