The Responsible Investment Association Australasia (RIAA) commissions annual research into the size and growth of responsible/ethical investment in Australasia. Their latest report, released 3 July 2019, is the only report of its kind in Australasia and provides a valuable comparison between the growth of ethical funds in Australia to those of the broader Australian financial market.
The 2019 Responsible Investment Benchmark Report (2019 Report) published by Responsible Investment Association Australasia found that funds implementing Core ethical investment strategies continue to outperform equivalent share funds1.
Spurred on by institutional investors, the ethical investment industry in Australia now consists of $980 billion of assets - a growing number (up from $866 billion 2017).
This represents 44% of total assets professionally managed in Australia in 2018.
WHAT IS AN ETHICAL INVESTMENT?
Ethical investments are investments that holistically consider environmental, social and governance (ESG), ethical factors and financial performance.
WHAT IS A CORE ETHICAL INVESTMENT?
The 2019 Report distinguished between Broad responsible/ethical investments and Core responsible/ethical investments.
Broad ethical investments are investments which use ESG integration as the principle ethical investment strategy. ESG Integration involves a general consideration and analysis of ESG factors when making an investment decision. By contrast, Core ethical investments are investments which apply at least one of the following strategies:
- Negative, positive or norms-based screening
- Sustainability themed investment
- Impact investing engagement
The distinction generally refers to the extent asset managers and funds are incorporating ethical investment strategies when making their business decisions. When compared to a Broad responsible investment, a Core responsible investment is said to implement ethical investment strategies such as screening, which extend beyond a mere consideration of ESG risks through the exclusion of certain sectors or companies.
HOW DO CORE ETHICAL INVESTMENTS PERFORM?
A key finding of the 2019 Report was that funds implementing Core ethical investment strategies continue to outperform equivalent Australian and international share funds and multi-sector growth funds over most time horizons.
It is important to note that the 2019 Report was not clear on whether such trends would have been impactedif figures relating to Broad responsible investments were incorporated.
WHY DO CORE ETHICAL INVESTMENTS PERFORM 'BETTER'?
While the focus of the 2019 Report was not to explain why Core ethical investment funds performed 'better' than equivalent funds, the commonly attributed reason is that ethical investment strategies help mitigate relevant risks from ESG and ethical factors.
For example, screening for weapons, tobacco and fossil fuels help limit the effect that adverse legislation and public sentiment might have on relevant investments. Likewise, it can also involve targeting companies with the best ESG performance within a sector or industry. In most cases, these well-considered decisions translate into improved financial returns.
It must be noted that some studies suggest that ethical investments perform no better than conventional investments and that even when they do, benefits are minimal2. While academic findings have differed, it is important to consider that the benefits of ethical investments extend beyond immediate financial performance.
Ethical investing strategies also bring about reputational benefits which cannot be quantified in the short term, but which may translate into better financial performance in the long term.
GOING FORWARD: RISK IN MANY FORMS
The increasing adoption of ethical investing strategies and the performance of Core ethical investment funds when compared to general funds highlight one core point: Risk takes many forms. It is with this in mind that investors and asset managers may be well advised to consider ESG factors and implement ethical investment strategies such as screening when making their next investment decision.
1Responsible Investment Benchmark Report 2019
2Theory and empirical evidence on socially responsible investing and investment performance: Implications for fund trustees and their members
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