Australia big supporter of UN protocol
Sixty- one of the signatories to principled investment ideals are ours, writes Claire Galea reports
OUT of 378 investment managers, asset owners and professional service partners who have signed up to the UN’s Principles for Responsible Investment, Australia accounts for 61, compared to 55 from the US and 42 from the UK.
The principles were introduced in 2006 as a set of global best practices for the inclusion of environmental, social and governance ( ESG) issues in investment decision- making and ownership. The aim is to help institutional investors achieve better long- term investment returns and sustainable markets.
The tide is rising. Combined assets under management of signatories already exceed $ US13 trillion and global organisations continue to sign up to the principles.
This highlights a change in the acceptance of sustainable investment drivers among mainstream Australian investment managers.
A 2007 study, Demystifying Responsible Investment Performance by Mercer’s Investment Consulting business, of 20 academic reports, revealed that half showed that taking ESG factors into account in investment decisions had a positive effect on portfolio performance.
The widespread acceptance by investment managers of ESG considerations can therefore create the potential for an investment to outperform over the longer term.
Sustainable investment was given another boost when consultants Mercer recently announced its global initiative to grade 3000 investment managers on the extent to which they incorporate ESG issues into their investment process.
In just over three weeks, more than 1700 managers returned their questionnaire to receive an ESG ranking from Mercer of between 1 and 4, with 1 being high. The results are made available to Mercer’s asset- owner clients on its Global Investment Management Database.
Mercer’s head of responsible investment Asia Pacific, Helga Birgden, points out that posting the results in this way is an incentive to investment managers to take a closer look at their ESG.
This initiative has been a client driver — we have done a lot of work talking to trustees and the boards of major global clients on ESG. They want to understand these issues better and to integrate them into their thinking and processes. This is a global rating across every investment manager across all countries and asset classes. There has been considerable investment growth in this area and now 15 per cent of all funds under management are a responsible investment dollar.’’
According to Leeora Black, founder and managing director of the Australian Centre for Corporate Social Responsibility, sustainable investment was pioneered in the US in the 1970s, where faith- based funds wanted to invest according to their principles.
Although socially responsible investment has become a global phenomenon, its principle- based approach has prevented it from becoming mainstream.
SRI will always be a niche sector which caters for individual preferences, even though it is growing rapidly and will continue to do so. The more interesting aspect of that phenomenon is the emergence of mainstream investment managers who are incorporating ESG criteria into mainstream decisions. That tends to be far more effective and powerful than the ethical investment movement has been over the last 30 or 40 years, and we are starting to see that happen really quickly,’’ says Black.
Monash sustainability enterprises director Doug Holmes agrees that SRI will remain a niche activity. The SRI part of the investment market will remain a niche activity. In the next 12 to 18 months we are going to see a lot of managers taking on this ESG data for the first time and incorporating it into mainstream risk analysis. That is the really big story that is happening at the moment.’’
The question for the well- intentioned investor is how to distinguish the real ESG fund managers from those who will inevitably jump on the sustainable bandwagon.
Russell research director of capital markets research Scott Donald believes that this is a valid concern. Governance and environmental questions were being asked 15 years ago, so it’s not as if people didn’t know of these things. What has happened is that people have become more aware of them. That’s why I’m a bit cynical about the way sustainable investing is presented to people, because it is more about a change in degree and emphasis than about a whole sudden revolution in the way people do things. So there is an element of hype among sustainable funds.’’
This criticism certainly doesn’t apply to investment house Australian Ethical, which was launched more than 20 years ago to do as its name suggests. Today the company offers both investment funds and a superannuation fund that are 100 per cent green and ethical.
Australian Ethical executive director James Thier warns potential investors to look beneath the surface of any SRI or sustainable fund to make sure it really matches their needs. It is important to know what your money is doing and not every SRI fund will suit every person. Some funds will give you a list of their top 10 stocks but this is likely to only make up 20 per cent of the portfolio — what is the rest of the portfolio invested in? A lot of funds will just give you the company names without any details about them, so you can’t even be sure of what your fund is investing in.’’
In an attempt to cut through the hype and keep PRI signatories on track, the UN, in conjunction with Mercer, produces an annual report of the performance of stakeholders.
The 2007 report showed 88 per cent of investment manager signatories conduct at least some shareholder engagement on ESG issues, while 82 per cent of asset owners are doing so.
So the good news is that it is rapidly becoming easier to find a sustainable mainstream fund manager. For those who feel they want to do a little more, there will remain the hard- core SRI funds which continue to raise the standard.
Get informed: James Thier
Initiative: Helga Birgden says clients want to understand ESG issues and to integrate them into their thinking