Sustainable investing is good for the planet, and good for investors. It is not just for the greenies, and it is no longer a niche market. As a category, core responsible investments have outperformed its benchmarks over 1, 3, 5 and 10 year periods 3, and there are an increasing number of options available for sustainably minded investors. Today, we bust four myths that might be holding you or your clients back from making sustainable investment decisions.
Myth 1: Sustainable investing is just for greenies
Truth: the majority of active investors are interested in sustainable investing; but they may not know where to start 2.
No longer just for greenies, the desire to live sustainably is hitting the mainstream. Most people want to be good citizens of the planet.
The term LOHAS, or Lifestyles of Health and Sustainability, has been coined to describe individuals who are concerned about personal health, health of the community and health of the natural environment. In Australia, the LOHAS market accounts for around 4 million adult consumers with consumer spending exceeding AUD$26 billion 1.
Research on this market shows that LOHAS individuals are highly conscious of the decisions they make and seek out firms that pass their values test. Importantly, they also become strong advocates among their peers for these products. These values are becoming increasingly broad based and entrenched across a wide cross-section of the population, and are now driving changes in consumer markets, politics and society.
No longer just for greenies, the desire to live sustainably is hitting the mainstream.
The trend towards sustainable consumption is also bubbling over to investing. According to a survey of 800 active investors, 71% of investors are interested in sustainable investing and 72% believe that companies with good environmental, social and governance (ESG) principles can achieve higher profitability 2
Millennial and female investors are substantially more likely to factor sustainability into their investment process decisions. In particular, millennials are more likely to invest in companies that have clear social and environmental goals and high quality ESG practices. They are also more likely to exit an investment position due to objectionable activity 2.
There is, however, a disconnect between the desire to live sustainably and taking action. While over 90% of consumers say that they have concerns about the environment, only 10% follow through with that behaviour 2. Most are unsure about what to do or where to start.
Most are unsure about what to do or where to begin.
Myth 2: Sustainable investing is a niche market
Truth: Sustainable investing is rapidly hitting the mainstream, with core responsible investment strategies showing strong growth.
Sustainable and responsible investment practices are rapidly gaining favour globally and in Australia. The Responsible Investment Association Australasia (RIAA) attributes the increased focus on responsible investing to four key drivers 3 :
Evidence that poor management of ESG issues can impact shareholder value
An increasing demand from consumers to align investments with their personal values
Increasing activist groups engaging the finance sector as a means to affect change
Increasing awareness amongst fiduciaries that ESG considerations are an important element of their responsibilities.
50% of Australia’s total assets under management ($629.5 billion) now fall under the category of ‘broad responsible investment’. This means that they have now incorporated ESG principles into their investment mandates. Although this is a step in the right direction, integration of ESG in the investment process doesn’t necessarily mean companies are included or excluded on ethical grounds. For some, it can simply mean the impact of any ESG issues on the value of a company is included in the valuation process.
Core responsible investments, a subset of this group, apply a primary responsible investment strategy which may include screening, be sustainability themed or employ impact investing principles. Traditionally known as Socially Responsible Investment (SRI) strategies, this group of investments accounts for 5% of assets under management and is growing rapidly, having doubled in the last two years from $15.2 billion to $31.6 billion 3.
And it’s not just the big end of town making the shift to sustainable investing. Retail investors are also putting their money where their mouth, or heart, is. According to RIAA, the value of ethical and responsible investing at the retail end of the market grew 24% to $32 billion last year.
Myth 3: It’s a trade-off between ethics and returns
Truth: As a category, core responsible investments are outperforming their benchmarks 3.
A major concern for many investors is that sustainability and financial gains are incompatible. However, as the sustainable investment market matures, data has become available to prove that this is simply not true.
Firstly, the sustainable consumer market is profitable. In 2015, sales of consumer goods from brands with a demonstrated commitment to sustainability have grown more than 4% globally, while those without grew less than 1% 4. Reflecting an increased preference for sustainable products, 66% of global consumers now also say they are willing to pay more for sustainable brands, up from 55% in 2015 5.
Secondly, analysis by the RIAA has shown that core responsible investments are outperforming their benchmarks (see Chart 2).
Myth 4: There aren’t many sustainable investment options
Truth: There are an increasing number of options for sustainable investing across most asset classes
To date, equity funds have been the most widely available and obvious choice for sustainable investment, however, an increasing number of options across asset classes are now available.
Many managers are now either incorporating core responsible investment strategies into existing funds, or launching new funds. Examples include the screening of tobacco companies from many existing super funds, adviser managed responsible investment portfolios, the launch of new exchange-traded funds, fixed interest funds, banking products, smart-beta funds, impact investment offerings and green bonds. The alignment of personal beliefs and sustainable investment objectives has also been touted as an advantage of separately managed accounts and a key opportunity for robo-advice.
With such a range of options now available, the question is where to start?
Sustainable investing in fixed interest asset allocation
Sustainable investment in fixed interest asset allocation is an easy place to start. Given a bond fund invests in a company’s ability to pay off debt, a sustainable fixed interest allocation should be an easy choice even for investors who remain sceptical about the trade-off between ethics and returns.
Historically, there haven’t been many sustainable options available for fixed interest allocations, but specialist Australian fixed interest manager Altius Asset Management believes in applying a similar degree of scrutiny before buying bonds in corporations or governments engaging in unsustainable activities.
The Altius Sustainable Bond Fund employs two levels of sustainability screening to invest only in companies which conduct their business and apply capital responsibly, giving full consideration to a range of ESG issues. You can read more about the screens employed by the fund here.
For investors with a desire to align their personal values with how they invest their money, and, given record-low interest rates, are seeking better returns for their defensive asset allocation - the Altius Sustainable Bond Fund might just be the way to have your cake and eat it too.
Sustainable investment in fixed interest asset allocation is an easy place to start.
1Lifestyles of Health and Sustainability Australia
2Institute for Sustainable Investing,"Sustainable Signals" (New York: Morgan Stanley Institute for Sustainable Investing, 2015)
3RIAA. 2015. Responsible Investment Benchmark Report 2015 Australia. Accessed 18 May 2016.