Weighing up what matters
Recent local and global events have brought back into the spotlight the impact we have on our planet and people.
More than 90 per cent of surveyed Australians are concerned about the environment and sustainability*. But it’s not just consumption Aussies are becoming more conscious about—there is growing awareness that where we put our money can also have a positive or negative impact on environmental and social issues around us, both domestically and internationally.
From our bank accounts to super funds and other types of investments, more of us than ever before are choosing to invest responsibly^. Seventeen per cent of surveyed Australians have responsible investments, and over a quarter (26 per cent) are also planning to invest in responsible investments in the next 12 months#.
The ESG approach to investing
When it comes to investing responsibly, you may have heard a few different terms; ESG investing, sustainable investing, ethical investing, and social impact investing, to name a few. While they do have some differences, generally they refer to an investment strategy that takes into account positive impact alongside financial performance.
A common thread that some of these approaches have, is that they often use ESG (Environmental, Social and Governance) considerations as a framework for measuring the long term sustainability of an investment. ESG considerations can include:
Environmental considerations
- Climate change, such as carbon emissions, energy efficiency, and product carbon footprint.
- Natural resources, such as water stress, biodiversity and land use, and raw material sourcing.
- Pollution and waste, such as toxic emissions and waste, and packaging material and waste.
- Environmental opportunities, such as renewable energy, green building, and cleantech.
Social considerations
- Human capital, such as labour management and development, health and safety, and supply chain labour standards.
- Product liability, such as product safety and quality, privacy and data security, and health and demographic risk.
Governance considerations
- Corporate governance, such as board, pay, ownership, and accounting.
- Corporate behaviour, such as business ethics, anti-competitive practices, corruption and instability, and financial system instability.
- Incorporating ESG considerations into your portfolio
One way to incorporate ESG considerations into investment decisions is through positive and negative screening—a process that includes (or excludes) industries, sectors, companies, countries, or regions that do (or don’t) meet an investor’s ESG considerations. For example, an investor may choose or wish to include and actively seek companies that demonstrate best practice towards climate change. Similarly, an investor may choose or wish to screen out companies linked to things such as armaments, gambling, or forced labour.
Importantly, in terms of the above, and achieving the desired outcome, consideration can often turn to investment ownership strategies. For example, direct investment in a diversified share portfolio or choosing a managed fund with ESG considerations.
The challenges with ESG investing
ESG investing is still evolving and maturing, therefore, assessing a company—or investment—based on ESG factors is, or can be somewhat of, a grey area. For example, a lack of regulatory requirements and demand for data transparency, on a global level at least, means there is often no universal standard for how ESG factors are reported on, so it can often come down to the individual company leaders to decide how and what they choose to disclose publicly.
Furthermore, while ESG ratings can be helpful, this does not necessarily mean that they are without flaws. For example, and depending on the circumstances, the rating a company receives may not always be based on how the company manages ESG risks, but rather to what extent they report on them.
These grey areas can potentially leave the risk of ‘greenwashing’ wide open—meaning there may be instances of over-inflated and even misleading claims about a company’s sustainability practices. The good news is that new global standards by the International Sustainability Standards Board (ISSB) may be on the way*^. If implemented, the standards will make companies accountable for ESG reporting in the same way as they are for financial reporting, reduce the potential for greenwashing, and help investors make more informed choices.
Balancing personal values with financial goals
Sound investment decisions are often based on a number of factors, including, for example, our personal values, financial circumstances, how long we expect to hold our investment, capacity (and tolerance) for risk, and the returns we need to generate to meet our financial goals.
How much our investment portfolio is influenced by ESG considerations may depend on, and come down to, how important these issues are to us. If they are important, consideration may also be required in terms of striking an appropriate balance between our personal values and financial goals. Doing so may help with preventing our portfolio from becoming too concentrated and ensure it has a material (appropriate) level of diversification to protect our investments from avoidable risk.
A final word about ESG and profitability
While it would seem that currently there is no conclusive evidence to suggest a strong (or definitive) correlation between a company’s ESG characteristics and its long-term share market performance, one research study has found a link between ESG and the valuation and profitability of companies*#.
If you’d like to talk to us about ESG investing, contact Carrick Aland’s Wealth planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
This report is prepared by Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837 (Bridges). Bridges is an ASX Market Participant and part of the IOOF group of companies. This report is prepared by the IOOF Research team for: Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837, Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323, Elders Financial Planning ABN 48 007 997 186 AFSL 224645, Financial Services Partners ABN 15 089 512 587 AFSL 237 590, Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252, RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429, Shadforth Financial Group Ltd ABN 27 127 508 472 AFSL 318613 (‘Advice Licensees’). The Advice Licensees are part of the IOOF group comprising IOOF Holdings ABN 49 100 103 722 and its related bodies corporate (IOOF group). The Advice Licensees and/or their associated entities, directors and/or employees may have a material interest in, and may earn brokerage from, any securities or other financial products referred to in this document or may provide services to the company referred to in this report. The document is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of the Advice Licensees. The Advice Licensees and associated persons (including persons from whom information in this report is sourced) may do business or seek to do business with companies covered in its research reports. As a result, investors should be aware that the firms or other such persons may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. The document is current as at the date of issue but may be superseded by future publications. You can confirm the currency of this document by checking the intranet site (links below). The information contained in this report is for the sole use of advisers and clients of AFSL entities authorised by the Advice Licensees. This report may be used on the express condition that you have obtained a copy of the Advice Licensees Financial Services Guide (FSG) from their respective website. Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the advice contained in this document, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before making a decision to acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance. The contents of this report should not be disclosed, in whole or in part, to any other party without the prior consent of the IOOF Research Team and Advice Licensees. To the extent permitted by the law, the IOOF Research team and Advice Licensees and their associated entities are not liable for any loss or damage arising from, or in relation to, the contents of this report. For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process.
* https://mccrindle.com.au/insights/blog/sustainable-events-for-a-sustainable-future/
^ https://responsibleinvestment.org/wp-content/uploads/2022/03/From-Values-to-Riches-2022_RIAA.pdf
# https://responsibleinvestment.org/wp-content/uploads/2022/03/From-Values-to-Riches-2022_RIAA.pdf
*^https://home.kpmg/xx/en/home/insights/2021/12/issb-sustainability-disclosures-talkbook.html
*#https://www.msci.com/www/research-paper/foundations-of-esg-investing/0795306949
