The tide has turned for Responsible Investment (RI). Every day I see RI in action, and quantifiable evidence is crucial to ensuring that the products and services of investment managers are meeting the needs of investors.
The Responsible Investment Association Australia (RIAA) recently issued a Report exploring the effect of social issues on how Australians invest. The Report found that 92% of Australians expect their superannuation and other investments to be invested responsibly and ethically. There is a clear expectation that fund managers should take into account environmental, social, and governance (ESG) factors when reviewing companies.
Super funds such as HESTA, AustralianSuper and REST have been nudging their investment managers to adopt their respective ESG policies. Now we are observing a similar push from individuals. A key finding of the Report is that seven in ten Australians would rather invest in a responsible super fund. Millennials would consider switching their investments to another provider if their current fund engaged in activities inconsistent with their values.
RI is now mainstream
There is evidence everywhere of the push to consider RI alongside financial outcomes. I exit at Wynyard train station in Sydney every weekday. At the station, the Commonwealth Bank cops a serve from Greenpeace in the form of an anti-coal funding poster.
The Dutch fund PFZW is set to divest from high-carbon companies, representing about 1.7 billion euros of assets. Citing the need to invest in a way that protects the environment, the fund reported it would divest completely from coal-related companies by 2020, while investments in fossil-fuel companies will be reduced by 30%. PFZW said:
“This will take place in four annual steps and result in investments being withdrawn from approximately 250 companies focused in the energy, utilities, and materials sectors.”
More importantly, PFZW believe the investment change will be “neutral to slightly positive” for medium-term investment returns. Do I hear anyone thinking stranded assets yet?
If that is not enough to scare a miner, closer to home, the Commonwealth Bank chair Catherine Livingstone told shareholders at the recent AGM that Australia's largest bank is winding down its funding of coal projects:
"We expect that trend to continue over time as we help finance the transition to a low carbon economy."
We are now seeing internationally-recognised economic and financial organisations debate ‘stranded asset’ exposures and asset divestitures and warn of the significant economic consequences of climate change in the financial press. We are also witnessing a surge in political and regulatory interventions in response to climate change, reflecting community concerns.
Many of these risks derive from evolving societal, governmental, and market perceptions rather than directly from the potential physical impacts of climate change. However, irrespective of their source, they have the potential to quickly and significantly affect the value of investments, and therefore, represent both material financial risks and opportunities.
These issues cannot be ignored by those entrusted with investment governance, notwithstanding their personal, moral or ideological views on the reality of climate change.
For those that don’t consider RI ESG as a key theme for investing, check Section 52 of the Superannuation Industry (Supervision) Act 1993. A key requirement contained in the Act is that trustees perform their duties and exercise their power in the best interests of beneficiaries. Considering the weight Australians (especially millennials) put on RI, fund managers must recognise investment desires that conform with client values.
Tarren Summers is the Co-Portfolio Manager of the Glennon Capital RI Future Leaders Fund and has completed the PRI Academy training in environmental, social, and corporate governance (ESG) issues for the investment and finance community.