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The unstoppable rise of investing with purpose

 

Socially responsible investing has skyrocketed in Australia over the past few years. What does it mean to invest responsibly and what is its impact?

Technology and the rise of social media are fundamentally changing how we choose to invest. In decades past, most investors were content to base their investment decision on a company’s financial fundamentals – what it did, how much it made, the calibre of its leaders – but now the wealth of information at our fingertips means we can’t avoid considering the full extent of a company’s operations. That includes its employment practices, and its community and environmental impact, throughout the supply chain.

“In the past you didn’t know what was in a company’s supply chain,” says Shamal Dass, Head of Philanthropic Services a JBWere. “You didn’t know who they were employing in other countries or what the conditions of work were there.”

It was the same for environmental impact. Now people know – and, moreover, they want to know. As the United States’ SIF Foundation notes, climate change is a major source of concern today, but there’s also growing concern about the breadth and depth of social problems despite unprecedented levels of wealth.

It’s hardly surprising then that a growing body of people prefer to invest their money in a way that more closely aligns with their personal values.

 

Integrating responsibility

This is reflected in the changing approach to professionally invested funds. There’s a commitment by many investment managers, superannuation funds and financial advisers to invest in a socially responsible manner, be it through integration of environmental, social and governance factors into their portfolios or excluding entire industries on the basis of values.

According to the Global Sustainable Investment Alliance, there are now $US22.89 trillion of assets being professionally managed under responsible investment strategies around the world,
an increase of 25 per cent since 2014. Meanwhile, Australia’s responsible investment market grew from $US148 billion in 2014 to $US516 billion in 2016 – a 249 per cent increase – and now accounts for more than half of all professionally managed assets.

Understandably, not all ‘socially responsible investment’ looks the same. While some people are content to exclude certain companies or sectors from their investments, there are those who want to change the world by making a targeted investment in a cause of their choice, whether through a fund, corporation or organisation.

JBWere identifies three core pillars in socially responsible investing. They are:

  1. Integration of environmental, social and 
governance (ESG) factors 

  2. Screening based on ethical, moral or 
religious beliefs (ethical investing) 

  3. Impact investing. 


 

1. ESG: The non-negotiable


 

JBWere considers ESG essential – not only for the purpose of socially responsible investments but for investing in general. While it seems to have that feel-good factor, Dass explains, really it’s about best practice. By considering a company’s environmental and social record, as well as how it’s governed, an investor ensures they have the additional data required to determine whether it’s being run well.

“People are realising that it’s got nothing to do with how you feel about what a company does. It’s how well they’re run and how well they’ve built their business to be sustainable into the future.”

In fact, ESG isn’t optional for JBWere clients. “There’s no opt out because if you fundamentally believe all the research, you can’t opt out,” Dass says. “You can’t say, ‘Hey, let’s not manage your portfolio in line with best practice because you’ve chosen not to’. Our job as advisers is to educate;
to say this is best practice so we’re doing it.”

 

 

2. Ethical investing: taking a stance


 

Ethical investing, on the other hand, is where you eliminate certain investments from your portfolio because of ethical, moral or religious beliefs. Whether or not a company has a high ESG rating has no bearing here.

“It’s much more of a personal choice,” Dass says. “You need to consider what your values align with.”

While it may seem relatively simple to rule out certain companies or industries, there are challenges. For instance, if you’re investing indirectly through a managed fund, it may be difficult to find what you’re after. You may wish to rule out tobacco or alcohol but have no problem with gambling. Finding that product can be tricky.

There’s also the fact that opting out of
a whole swag of industries might seriously deplete your pool of potential investments, particularly in a small market like Australia. “Ethical investing can potentially reduce financial performance because it’s necessarily limiting the universe you’re investing in,” Dass notes.

However, he shrugs this off. “If it’s values-based then that shouldn’t really matter to you because not being in tobacco matters more to you than the one per cent return you gave up.”

 

 

3. Impact investing: looking to the future

 

 Impact investing is different again. Its aim is to address the world’s most pressing challenges by investing in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare and education.

“Impact investing takes a completely different lens,” Dass explains. “It’s not just one or two products that you tack onto your traditional investments. It’s a whole different way of thinking – of investing.”

Ultimately it aims to overcome the tension between making a lot of money and doing good. “Why can’t your investment be about making six or seven per cent return while you build a water facility in a poorer country that will improve nutrition and save lives?” Dass asks. “You don’t have to make money over here and give out money over there as a philanthropist. You can actually do the whole thing together.”

The difficulty with impact investing, however, is a lack of supply and demand. “Impact investment is still developing, and we’re all trying to evolve quickly and not only understand the deals but convey it to investors” Dass says.

For now, it’s effectively out of reach of the average mum-and-dad investor, he adds, and there are barriers to entry for the institutional investor as well. “Scale is the issue at the moment – to build the deals in which the big funds can participate,” Dass says.

Nonetheless, he remains very upbeat about its future prospects. “The potential is still there. It’s just people need to become a bit more broad in their understanding of what it is.”

While JBWere is taking the lead in Australia, Dass argues that all wealth managers have an important role to play here.

“We don’t want this to be our key differentiator forever and a day. We expect that the other larger wealth houses will [step up] and it’s completely necessary. That’s how it becomes the norm – because everyone does it.”

A sense of purpose

In the meantime, all investors can
benefit from the fact that there are more opportunities than ever to invest in the responsible investment market. Thanks to technology, even the smallest investor can
do their own homework to decide which company stocks they wish to avoid and which stocks might just help save the world.

 

Important information

This information is provided by NULIS Nominees (Australia) Limited, ABN 80 008 515 633, AFSL 236465, a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies. An investment with NULIS does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. NULIS believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). Past performance is not a reliable indicator of future performance. This information is current as June 2018 and may be subject to change, for example should there be a change of legislation or economic conditions.

Case studies in this publication are for illustration purposes only. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent. 

 

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