Drought, fire, wa­ter as well as cli­mate drive in­vestors’ sen­ti­ments

The Weekend Australian - Review - - Investments - Louise O’Hal­lo­ran is the ex­ec­u­tive di­rec­tor of Re­spon­si­ble In­vest­ment As­so­ci­a­tion Aus­trala­sia ( RIAA)

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.

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