‘Sustainable investing’ has long been considered a buzzword or marketing term to lure socially minded investors. But it’s become clear that the drive towards sustainability is becoming a priority as 86 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically.
The industry is responding to the demand, with leading players such as HESTA promoting responsible investing in recent campaigns and First State Super changing its name to Aware Super in September. So, how can Australians choose a fund that has strong sustainability credentials but will also deliver good financial returns?
Don’t compromise on financial performance
With Australia in recession, it would be easy to assume that financial performance will be compromised, but that isn’t necessarily the case.
One of the key findings from the Responsible Investment Association Australasia (RIAA) Responsible Investment Benchmark Report 2020, which examined the size, growth and performance of Australia’s responsible investment market, was: “Overall, it was found that responsible investment funds outperform mainstream funds over most time frames and asset classes.”
Looking abroad, US investment bank Morgan Stanley evaluated more than 10,000 funds and managed accounts to find: “Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time.”
For example, the AtlasTrend Clean Disruption Fund delivered returns of 8.65 per cent from the start of 2020 to 31 July 2020, recovering losses from the March sell-off induced by the COVID-19 pandemic and completely bucking the market trend.
It was the top-performing fund focused on climate change within the Australian Core Strategies universe, according to FE Analytics. The fund invests in the clean disruption of energy in areas such as energy storage, transportation, infrastructure, manufacturing, building materials and lighting, and recycling and waste management.
When it comes to superannuation, many Australians are increasingly seeking greater transparency to better understand where their money is being invested to ensure it aligns with their values while realising it may still be possible to secure good financial performance – even in these difficult times.
There is no doubt that sustainable funds are performing well. Recent research by Morningstar noted “companies that score high on ESG (environmental, social and corporate governance) tend to be well-run businesses that treat their stakeholders well, address their environmental challenges, enjoy more conservative balance sheets and have lower levels of controversies.”
The world’s largest fund manager, Blackrock, has made it clear that companies should serve a social purpose and is making sustainability integral to how it builds its portfolio and manages risk for investors.
It stands to reason the trend of companies building a better world through their products and services is set for multi-decade growth, particularly given the growing consumer shift toward spending money in a way that aligns with their values. Therefore, companies focusing on sustainable practices, offering products and services aligning with this consumer demand, are more likely to achieve stronger, long-term growth prospects.
Understand the investment
We’re told our super can create a more sustainable world. But how does that work in reality? It depends on the type of investment you hold. So, let’s dive into some of those investments that may end up in an ‘ethical’, ‘responsible’, ‘sustainable’, or ‘green’ super investment portfolio.
Investing in shares
Direct investment through equity securities (e.g. purchase of ordinary shares in a company) is essentially part ownership of an asset; usually a business. This means that through your investment, you own part of the company, and a proportionate share of the profits the company may distribute.
Let’s consider a solar energy producer versus a cigarette manufacturer for impact on society. If you’re invested in a profitable solar energy company, you’re benefitting financially while the company sells a product creating a greener world. If you’re invested in a profitable cigarette company, you’re potentially making money at the expense of someone buying a known cancer-causing product. Which company would you support?
The rise of impact investing is an exciting development in global finance, whereby the financial markets provide capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance. So, what is it?
Impact investments are those made with the intention to generate positive, measurable social and environmental impact alongside a financial return. An example of an impact investment is Social Ventures Australia’s (SVA) Resolve Social Benefit Bond. It is aimed at improving the mental health and wellbeing of participants while generating significant savings for the NSW government through a reduction in participants’ use of health and other services – in particular, by reducing the number of days spent in the hospital. These savings will be shared to fund the delivery of the program, as well as with investors to provide a financial return on their capital.
This type of investment is distinct from philanthropy, as not-for-profit and charitable organisations are rarely concerned with a financial return. That is not to say an impact investment guarantees a financial return, nor does it guarantee an ‘impact’ – environmental, social or other.
How impact investments measure their ‘impact’ is of vital importance to the success of such investments, and choosing what and how to measure it is not a straightforward task.
Global Impact Investing Network (GIIN) lists the following as best practices for impact measurement:
- establishing and stating social and environmental objectives to relevant stakeholders
- setting performance metrics/targets related to these objectives using standardised metrics wherever possible
- monitoring and managing the performance of investees against these targets
- reporting on social and environmental performance to relevant stakeholders.
Green bonds, also known as climate bonds, are debt investments (or loans) intended to encourage sustainability and support climate-related or other types of special environmental projects.
More specifically, green bonds finance projects are aimed at:
- energy efficiency
- pollution prevention
- sustainable agriculture
- fishery and forestry
- the protection of aquatic and terrestrial ecosystems
- clean transportation
- sustainable water management
- cultivation of environmentally friendly technologies.
Green bonds have been growing increasingly popular, and currently there is an estimated $US62.8 billion financed by green bonds. There are also different types of green bonds. The World Bank issues green bonds to finance projects around the world, such as India’s Rampur Hydropower Project, which aims to provide low-carbon hydroelectric power to northern India’s electricity grid.
Be it through green bonds, impact investing or direct investment, the more money invested in companies producing goods and services that impact positively on society, the more we can help achieve the UN’s Sustainable Development Goals.
Victoria Kent is a senior investment specialist at Elevate Super
Have you checked where your super fund invests your money? Have you been tracking the returns from ‘sustainable’ funds?
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Important notice: AtlasTrend Pty Ltd (ABN 83 605 565 491) is the promoter of Elevate Super and an AFSL Corporate Authorised Representative (No. 001233660) of Fundhost Limited (AFSL 233045) and Arrow Securities Group Pty Ltd (AFSL 448218) (Arrow). This communication contains general advice only and does not take into consideration your personal objectives, financial situation or needs. None of the information provided is, or should be considered to be, personal financial advice. The information provided in this communication is believed to be accurate at the time of writing. None of AtlasTrend, Aracon Superannuation Pty Ltd, Arrow or their related entities nor their respective officers and agents accept responsibility for any inaccuracy in, or any actions taken in reliance upon the general advice provided. A copy of AtlasTrend’s financial services guide can be found at www.elevatesuper.com.au/fsg. This communication is not an offer to invest in Elevate Super. Before deciding on Elevate Super, you should read the Product Disclosure Statement available at www.elevatesuper.com.au/pds or by calling Elevate Super on 1800 875 148 and seek professional financial advice to consider if Elevate Super is appropriate for you. Elevate Super is a sub plan of the Aracon Superannuation Fund. Elevate Super is issued by Aracon Superannuation Pty Ltd (ABN 13 133 547 396, AFSL No. 507184, RSE Licence No. L0003384) as Trustee of the Aracon Superannuation Fund (ABN 40 586 548 205).