Aus­tralia big sup­porter of UN pro­to­col

Sixty- one of the sig­na­to­ries to prin­ci­pled in­vest­ment ideals are ours, writes Claire Galea re­ports

The Weekend Australian - Review - - Investments -

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

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