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.
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.
"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.
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.
Source: Responsible Investment Association of Australasia, Annual Benchmark Report, 2019
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"
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.
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.
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.
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.
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.
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
The information is prepared by BT Funds Management Limited ABN 63 002 916 458, AFSL Number 233724, RSE Licence No. L0001090 (BTFM) and BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS).
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs before acting on it.
BTFM and BTPS are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 (Westpac). An investment in, or acquired via, a BTFM or BTPS product is not an investment in, deposit with or any other liability of Westpac, any Division of Westpac or any other company in the Westpac Group. It is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. Westpac and its related entities do not stand behind or otherwise guarantee the capital value or investment performance of the products.
©Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714