Did you know that three out of five Australians think it is important that their investments are aligned with their personal values?
Further, according to the Responsible Investment Association of Australasia (RIAA), responsible investment now makes up 18% of all funds under management. And this is likely to be understating the true figure.
The term ‘responsible investment’ (RI) is not new.
Ethical or socially responsible funds have been around for a long time, but it has only been in recent years that the practice of investing responsibly has started to become main-stream.
This is largely thanks to institutional fund managers, such as superannuation funds, around the world signing up to the UNPRI (United Nations Principles of Responsible Investment) – principles that aim to help integrate environmental, social and corporate governance (ESG) issues into investment decision-making. In Australia, eight out of the top 10 largest institutional fund managers have now signed up to UNPRI.
For financial advisers, accessing RI is a little bit trickier, but not as difficult as you might think.
Not all RI funds are the same.
If you think of RI as a spectrum, at one end sit those that integrate ESG issues into financial decision making and at the other end, you have ethical investors who screen companies in or out of portfolios based on a set of pre-determined values.
As an example, an ESG manager will only avoid or underweight a company if the risk from one of those issues is likely to adversely impact the share price. So, it might have avoided BP prior to the Gulf of Mexico oil spill due to the high instance of health and safety violations and therefore an increased probability of a spill occurring. However, an ESG manager would invest in a retail clothing company using third world sweatshops if using this type of labour will not adversely impact the company’s share price. There is no values-based screening by most ESG managers.
On the other hand, an ethical manager might avoid certain companies or sectors based on what they produce. For example, most ethical managers avoid tobacco or weapons manufacturing because they believe it is fundamentally wrong to profit from those products.
Other ethical issues include alcohol, human rights abuse, animal cruelty and coal for example.
A few ethical managers will seek out and invest only in those companies that are having a positive impact and this tends to make them overweight in sectors such as healthcare, energy efficiency and technology.
So how do these funds perform?
The annual benchmarking report by RIAA shows that RI funds (but not including ESG) outperform their mainstream cousins across multiple asset classes and multiple time periods. The table below is an extract of this performance for Australian Share Funds.
| Australian Share Funds* |
1 year |
3 years (p.a.) |
5 years (p.a.) |
10 years (p.a.) |
| Average Responsible Investment Fund (50) |
21.5% |
2.9% |
-1.2% |
11.3% |
| Australian Share Fund Average |
18.1% |
1.7% |
-2.2% |
8.2% |
| S&P/ASX 300 Index |
19.7% |
2.8% |
-1.8% |
9.1% |
*Fund figures are shown net of management fees
The average RI fund actually outperforms the broad market index and the average Australian equity fund across the short, medium and long term.
What are the main issues for advisers?
The availability of RI funds across multiple asset classes can be limited. Whilst there is an abundance of Australian share funds across the spectrum, for other asset classes there are only slim pickings, making it hard to construct a diversified portfolio of only RI funds.
The second main issue is that advisers rarely talk to clients about responsible investment, despite the latent demand. Is this something you should be adding to your fact find?
Adam Kirk is the General Manager of Business Development and Client Relations at Australian Ethical. He has extensive experience in leading business development and client relationship teams in superannuation and retail funds management.
