Sustainable Investing

Sustainable investing has shown significant growth over the past few years, and as ethical investment opportunities continue to grow, so too will its popularity. In 2019 alone, the number of funds rose from 2,045 to 2,405, and COVID-19 hasn’t slowed things down at all. In fact, according to Morningstar, a US financial services firm, 23 new sustainable funds were launched in the first half of 2020 with more to come.

Australia & New Zealand Sustainable Fund and ETF launches

Sustainable / ESG investing has rapidly grown to accommodate investors’ demand, including more younger adults and women. Interesting, the GSIA 2016 Global Sustainable Investment states that three-quarters of Australian millennials say they prefer to invest in a responsible super fund than in a fund that only considers maximising financial returns. Moreover, a Vanguard survey revealed that women are more likely to expect their super or other investments to be invested responsibly and ethically (57% of women compared to 42% of men).

Companies are given an ESG Rating based on their cumulating total ESG performance. There are many different ratings, including the Bloomberg ESG Data Service, DowJones Sustainability Index (DJSI), and Corporate Knights Global 100, which are out of 100, and the MSCI ESG Research, which is rated CCC, B, BB, BBB, A, AA, and AAA; worse to best). A company with a AA or AAA MSCI ESG Rating is regarded at the forefront of its industry, in regards to managing the most significant ESG risks and opportunities.

Whether you are starting out as an investor or been doing it for years, there is value added through having professional management in using their skills and expertise to screen and filter through all the companies to choose the right ones to invest in. By using skilled investment managers, you will be able to ensure that your investments are invested in sustainable funds which are reflective of your ethical and responsible wishes.

From there you would like to diversify across the major asset classes (Australian shares, International shares, Listed property, and Fixed Income) to ensure that you are not taking too much risk to achieve your investment goals. Typically, this can be done through a risk profile exercise.

Once you have found sustainable funds and diversified appropriately, the next step is to ensure that you monitor the funds regularly to see that they are still reflective of your values and also that their performance is satisfactory.

Although sustainable investing isn’t for everyone, it does deserve consideration as part of your overall investment strategy for a couple of reasons, namely:

1. More than half the wealth globally is being managed by some 1,700 signatories to the United Nations Principles of Responsible Investment (UNPRI). This means they are looking at ESG filters and screens as they make their investment decisions, so it makes sense you should too. One of the leaders in this is BlackRock CEO Larry Fink, who’s written a letter to clients outlining their belief that sustainability should be the new standard of investing.
2. The growth in the number of sustainable / impact / responsible / ESG funds is growing at a record rate in both evidence of the growth and future continued growth in the desire for more investment options in this space.
3. Performance of many of the sustainable investments has been in the top quartile relative to their peers who do not apply ESG filters which can lead to the assumption that the CEOs and businesses that are thinking about these issues are ahead of the curve in not just their sustainable investing thoughts, but also other areas of business.
4. While the increased performance is nice, there is also a view that risk is better managed as the CEOs and businesses that manage sustainable risk seem to be better managed and look more so for quality style business, which can tend to be more profitable as well as resilient through market volatility.