As more people take stock of their lives and some seek green and tree changes, there’s been a significant increase in the number of people who are looking at sustainable investing to secure their future finances.
Over the past two years, there’s been an incredible 420 per cent increase in net flows into BT sustainable investment options, with $1bn added to these investments in the last financial year alone.
This exponential growth in sustainable investing seems set to evolve even further as people gain a better understanding of environmental, social and governance (ESG) factors.
Now more than ever, people consider how a company approaches issues like climate change and human rights just as important as the money it makes.
This, added to the growing understanding that ESG principles can drive better long-term returns, has elevated the demand to a whole new level.
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A recent benchmark report by the Responsible Investment Association Australasia (RIAA) found there’s been a surge in the popularity of responsible and ethical investing.
In the most comprehensive review of the responsible investment sector in Australia, the report found the responsible investment market reached new highs in 2020, increasing from $983 billion in 2019 to $1,281 billion in 2020.
Additionally, the proportion of responsible investment AUM to total managed funds AUM grew from 31% to 40% in 2020, despite there only being a 2% increase in all professionally managed fund assets in Australia over the same period.
The fact that the proportion of assets under management is growing at more than four times the rate of the wider investment market, reinforces the growing recognition that responsible investments make good financial sense.
And 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 economies worldwide.
|Multi-sector growth funds||1 Year||3 Years||5 Years||10 Years|
|Responsible investment fund average - multi-sector growth funds*||7.2%||7.4%||7.9%||8.2%|
|Morningstar category: Australia fund multi-sector grow**||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%||11.0%||11.4%||10.1%|
|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%||5.3%||7.4%||8.1%|
|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%||5.3%||7.4%||8.1%|
|S&P/ASX 300 total return||1.7%||6.9%||8.8%||7.8%|
* Data provided by survey respondents
** Data provided by Morningstar DirectTM
|Average responsible investmetn fund outperformed (+1%)|
|Average responsible investment fund on-par with market (+/-1%)|
|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.
The report highlights how ESG integration is becoming a foundation of prudent investment management. In 2020, 57% of investment managers had at least 85% of their AUM covered by an explicit and systematic approach to ESG integration, compared to just 41% in 2019.
This presents a huge opportunity within the financial advice and wealth management sector in Australia.
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.
As such, we think about sustainable investments in two ways.
1. Are they focussed on not investing in companies who's products or behaviours don't align with their own ethical beliefs or values?
2. Do they want to make a difference by investing in companies that provide solutions to global problems like water supply or energy consumption?
3. Are they most interested in investing in companies that may have better risk/return profiles through good ESG management practices?
Consider investments that exclude activities, products or companies of most concern to your client.
Consider introducing an allocation to investments that have an impact objective, or employ a positive screen
Consider investments that articulate how ESG integration and asset stewardship impacts their investment process, for example through an Sustainable Investment Policy
Investments that prioritise sustainability
Investments that integrate sustainability
Sustainable investing is a way of connecting with customers through their hearts, minds and wallets and with the right level of knowledge, it could be a rewarding way for advisers to connect with their clients and give them greater confidence in their investments.
With this growing recognition of the role that finance plays in generating positive social, environmental and economic outcomes, consumers’ expectations have changed when it comes to a company’s level of financial performance and the rising materiality of different social and environmental issues – from climate change to racial inequity.
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.
Similarly, the RIAA report shows that just one quarter of investment managers in Australia are practising a leading approach to responsible investment, highlighting a continuing gap between investment managers that claim to be practising responsible investing and those that can demonstrate they are. It’s not good enough for an investment manager to simply claim they’re investing responsibly because if they’re not doing it well, there’s a high risk of losing business.
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.
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.
A Responsible Investment Leader demonstrates a commitment to responsible investing – explicitly considering ESG factors in investment decision making, acting as a strong and collaborative steward and reporting activities, including the societal and environmental outcomes achieved.
The next challenge for the maturing Australian responsible investment market is to improve the monitoring and reporting of sustainability outcomes.
At BT, we’ve partnered with Morningstar and Sustainalytics to provide ESG research tools on BT Panorama that highlight an investment’s exposure to ESG risk and allow you to consider the sustainable approach of companies when making decisions about investments.
To help meet the increasing interest in sustainable investment from advisers and clients, we also expanded the list of sustainable investments available through BT Panorama by almost 10 per cent in the first half of 2021.
A discussion on sustainable investing can be a great way for advisers to engage with their clients. It’s topical, relevant and lends itself to longer-term investment horizons and strategies.
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