Drought, fire, water as well as climate drive investors’ sentiments
THE landscape for responsible and sustainable investment is changing rapidly. New investment products designed to optimise the way we use the land have emerged, driven by a host of issues. Climate change is an outstanding example, but there are many others.
Drought, flood, storms and fire causing havoc with crop quality and productivity; the end of cheap oil leading to massive investment in bio- fuels; skyrocketing grain prices and destruction of native forests and rising demand for forestry carbon projects; and population growth fuelling food demand are just some of the concerns affecting the way we are choosing to invest.
While these issues are often categorised as ‘‘ intangible’’ and unable to be measured, the fact remains that they are having an increasingly significant effect on company value. Which means that they are having a similar effect on our investments.
For example, the agricultural investment industry has delivered impressive returns of 39 per cent in the year to April 2008. In the same time period, the UN Food and Agriculture Organisation reports global food prices have risen 40 per cent .
In light of these global challenges, the investment community faces new questions:
Do superannuation funds and consultants need to rethink asset allocation to make way for better and smarter land- based investments?
What types of products are emerging and what risks and returns can we expect?
What risks do investors face in the escalating competition between food and fuel?
Equity Trustees head of private clients Shaun Manuell believes sustainability needs to be assessed by investors on a multi- level basis. ‘‘ The first level is about identifying the potential winners and losers of the obvious sustainability issues, for example, identifying companies involved in projects such as renewable energy.
‘‘ The second level is a little more abstract. It involves assessing how existing companies, industries and regions are going to be impacted by sustainability issues, and more importantly, how they propose to react to these global issues,’’ says Manuell.
Taking environmental social and governance ( ESG) issues into the heart of investment decision- making is not radical and it’s certainly not soft. It could well prove to be one of the smartest and most prudent and conservative investment styles that we’ve seen in decades.
A major misconception is that by integrating ESG issues one must accept a lower return on investment. Terry A’Hearn, director of sustainable development and chair of UNEP FI Australian Activities, says this is not so.
‘‘ Research is indicating that companies with strong environment, social and governance structures in fact outperform those with lower ratings. Integrating ESG issues into an investment decision is not about making a moral judgment; it is about incorporating all relevant issues, including ESG, into the investment analysis to ensure the best investment outcomes.
‘‘ ESG or extra- financial criteria, such as human capital, environmental, social and corporate governance factors can have a positive affect on long- term corporate performance,’’ A’Hearn says.
Climate change, food scarcity, energy conservation, refugee politics, ecosystem collapse and water scarcity are all issues that have moved rapidly from the niche world of sustainable and ethical investment onto the desk of your average investor.
Investors in Australia are becoming increasingly anxious to discover what these issues will cost and how those costs will be identified.
This trend is reflected globally with more than 380 institutional investors, representing some $ US13 trillion of assets, signing the United Nations Principles of Responsible Investment ( UNPRI), which asks investors to embed ESG issues into everyday investment decisions.
The significant uptake in Australia is more evidence that ESG is moving into the mainstream. Already 40 per cent of all funds under management in the Australian superannuation industry are managed by signatories to the UNPRI.
The UNPRI was established in 2005 by the United Nations Environment Program Finance Initiative and UN Compact Global to develop a framework of investment principles that may better align investors with broader objectives of society.
Bodies such as the Responsible Investment Association Australasia ( RIAA) are at the vanguard of development of a responsible investment industry.