First appeared in Money Management, 12 March 2018
In recent years, the topic of responsible investment has moved from being an esoteric subject matter into the mainstream. Many companies now have dedicated functions committed to sustainable practices, and many fund managers offer responsible investment options.
While historically, responsible investment or sustainability may not have been the main driver in client-adviser conversations, research indicates it will likely play a larger role in the future.
Research shows that 90 per cent of Australians believe sustainable investing is important and 85 per cent of Australians believe superannuation should be invested responsibly1.
We recently sat down with clients and advisers to ask them their thoughts on responsible investing. It’s clear there is a lot of information available on this topic, but some confusion also persists.
So, if you find it hard to clearly articulate how to best approach responsible investing – you’re not alone.
You may have also noticed that terms like ethical and sustainable investing are often used interchangeably, but this isn’t necessarily accurate. Here’s a quick primer to help clarify some of the key terms used in this article:
Responsible investing is an umbrella term used to describe any process that considers environmental, social or governance (ESG) practices in the investment process of research, analysis, selection and monitoring of investments. This includes sustainable, ethical and impact investing.
Sustainable investing is about how a company does what it does not what it does. How does it manage its long-term stakeholders, corporate social governance, ethical and environmental factors?
Whilst sustainable investing encompasses a range of investment approaches it’s important to remember that the focus of sustainable investment strategies is about understanding the full picture.
This includes being able to assess a company’s long-term value, based on not only financial factors but also the appropriate ESG factors that may influence the investment performance.
Ethical investing involves excluding certain industry sectors, companies, practices or even, at times, countries based on specific values-based criteria from a fund or portfolio typically on personal or ethical grounds.
So, if you are building a portfolio for a client and you are screening for exposure to industries based on their preferences, for instance tobacco, you’re applying ethical investing principles.
Lastly, the impact investing is focused on businesses with a distinct social or environmental purpose such as a focus on improving social outcomes, or renewable energy.
It’s important for impact investments to generate a positive social or environmental outcome as well as a financial return. Impact investing is a growing approach, so the definition is still evolving, in some cases impact investments may prioritise positive impact over financial return, although this may not always be the case.
Both ethical and impact investing are primarily focused on what companies do.
So why should you raise this with your clients?
1. They care about it (or - are interested in in it)
Chances are, they care about it. Recent research from the Responsible Investment Association of Australasia (RIAA) shows that one in two Australians (53 per cent) will consider making ethical or responsible investments in the next one to five years. And the probability is greater for younger generations and females.
Even if this is currently an underrepresented proportion of your client base, it is likely to grow, particularly as intergenerational wealth transfer continues. And no doubt your expertise in this space is a valuable tool to help with engagement and retention of clients.
2. It helps you to connect with your clients and meet their objectives
Even though your clients may have an interest in sustainability, we know it’s unlikely they understand it well and how it fits into their investment portfolio. The opportunity exists to help clients understand how they can align their investments to their values and sustainability principles.
3. It's a point of differentiation
The market for responsible investments is growing. There are mainstream ethical and sustainable investment products available in most asset classes and across various risk profiles.
Sustainable investing is in fact a well-established process used by institutions such as fund managers and super trustees to help manage financial risk – almost half of all assets professionally managed in Australia use ESG integration.
What’s more, in many cases responsible investments outperform their equivalent benchmark.
Research conducted by RIAA noted that “the comparison of responsible investment funds against mainstream equivalent funds and their benchmark index indicates outperformance across the majority of time periods.”
So, with all this in mind, what should you ask your client?
Firstly, it’s important to understand what is important to your client. And if they are interested in sustainability – how sustainable is sustainable enough?
You may find some clients that express an interest in sustainability may be pleased to know that the fund managers you recommend are looking at ESG issues and considering them when making investment decisions on their behalf.
And other clients may have concerns about certain industries for which they feel there is a mismatch of values, for example tobacco or gambling, and would prefer to limit their exposure.
4. It's not all or nothing
Depending on your clients’ needs, you don’t always have to address responsible investment preferences across the whole portfolio. Some clients might prefer to have a small satellite investment that addresses a key sustainability concern or better reflects their values.
There are a range of products that will allow you to select an option that aligns with the principles of responsible investment across varied asset classes and for most risk profiles.
The best way to start?
Have the conversation. Understand what’s important to your client and be clear about if and how they want responsible investment principles considered in their portfolio.
From there, you can select the most appropriate investment options.
What’s more, having this conversation regularly will provide your client with yet another proof point that your advice is not only valuable but also tailored to their needs.
Emma Pringle, Head of Customer Governance and Sustainability - BT
1. 2016 BT Australian Financial Health Index. The survey canvassed 4486 Australians in 2016.
Information current as at 12 March 2018. This document has been prepared by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716) for the general information of advisers only. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. 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 having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. ©Westpac Group 2018