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Where could responsible investing take you?

Estimates of the size of the sustainable investment market vary from around $23 trillion1 to almost $31 trillion2, with responsible investment taking into account environmental, social and governance (ESG) factors in investment decisions, whereas ethical investing being more of a values-based approach.

In Australia, investments managed in an ethical or responsible manner came in at $980 billion3 in 2018 – more than half of all assets professionally managed. That’s up 13 per cent on the previous 12 months thanks to positive portfolio performance and increasing demand3.


Whatever label used to describe sustainable investments, it’s a growing sector, having moved beyond simply excluding certain industries like tobacco, weapons and gambling. For example, it now considers positive exposures in renewables, in new technology such as electric vehicles and batteries, and in new medicines, vaccines and health care innovations. It also takes into account the environmental impacts of traditional investments in oil, gas and mining, and the social impacts of traditional investments in consumer staples like supermarkets, and the banking and finance industry.

 

Who’s buying?


Demand for ethical investments is growing across every demographic.


Research indicates that both millennials and retirees increasingly want their super invested in a socially responsible way.


“Superannuation member surveys have shown that members see ethical investing as a way in which they can align their retirement savings to their values, in a similar way to how they might choose to shop or buy groceries” says Colonial First State Executive Manager Corporate Responsibility, Jodie Tapscott.


“Some members have told us that they want to ensure that they invest in renewables, that the companies their super is invested in aren’t polluting the environment or taking advantage of workers. We can draw the conclusion that these members are also thinking about the future world they will live in or that their grandchildren will inherit.”

 

Members see ethical investing as a way in which they can align their retirement savings to their values, in a similar way to how they might choose to shop or buy groceries

How are ESG investments performing?


Happily, there’s no need to sacrifice returns for principles, or vice versa. Institutional investors – such as super funds - have led the push in responsible investment, creating a scale of demand that’s difficult to ignore.


Now retail investors are seeing the sector as more than just a feel-good option – “the investment returns from responsible investment options are generally on par with traditional investment choices,” says Tapscott. Studies have shown ESG options offered by super funds were found to be some of the most consistent performers over one, three, five and 10 years4.


Across the share market, almost all ASX200 companies now report their ESG policies and sustainability targets5 and a 2018 study found that ASX200 stocks with high ESG scores “significantly outperformed” the ASX200 average over a seven year period6.


The Australian experience reflects worldwide research showing that companies with better responsible-investment standards have stronger financial performance that exceeds benchmarks, including in emerging markets7. This increasing attention has led to more than 80 per cent of S&P 500 companies now reporting on their ESG measures.

 

Why now?


Recently, United Nations member countries adopted 17 Sustainable Development Goals (SDGs) to be achieved by 2030. These goals recognise "that eradicating poverty in all its forms and dimensions, including extreme poverty, is the greatest global challenge and an indispensable requirement for sustainable development."8


This has brought more focus on responsible investing, says Professor Carol Adams, an internationally renowned author in integrated and sustainability reporting, and social and environmental accounting.


The benefits and opportunities for businesses, and by extension investors, are “significant”, says Adams.


“Businesses which set out to contribute to the SDGs through their mission and strategy stand to gain a competitive advantage in developing products, services and processes fit for future challenges,” Adams told an Australian Senate inquiry into the SDGs9.


On the other hand, if businesses fail to respond to the demand for change, they may face substantial long-term risks, given the increased government pressure on emissions targets; changes to corporate governance principles; and green and sustainable finance initiatives, she concludes.



What’s next?


Super funds are becoming more active as responsible investors, with many offering bespoke ethical or socially responsible investment options. This gives investors a chance to reallocate their money in line with their personal values.


But before you dive in on a mission to do good while saving for your retirement, speak to your financial adviser about available options that can contribute to your long-term financial well-being.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.