Ethical funds continue to outperform their mainstream rivals, and experts say the mining downturn has been a tipping point for the sector.
According to the Responsible Investment Benchmark Report 2015 Australia, there is $629.5 billion invested in funds that broadly integrate environmental, social and governance (ESG) concerns into their investment mandate. Within that, $31.6 billion is invested in core responsible investment funds, those that invest based on impact, are sustainability themed or those that screen out certain investments.
The report found that the latter group, core sustainability funds, routinely outperform the ASX 300 over time. Core responsibility funds delivered, respectively, returns of 6.9 per cent, 17.6 per cent and 8.1 per cent over one, three and 10 years. Over the same time frame the ASX 300 delivered returns of 5.3 per cent, 14.7 per cent and 7.4 per cent.
Managing director of Australian Ethical Phil Vernon says one reason for the outperformance of responsible funds is the way they invest. Australian Ethical is a fund manager that focuses on socially responsible and environmental investing.
“We are active managers and we are leveraged to growth sectors like health and technology. We are not in fossil fuels or resources so we have avoided the resources downturn,” Vernon says.
According to Vernon, his funds are skewed to capitalise on future trends. “We are weighted to renewables and we believe the sector is at a tipping point. What’s happening in resources is positive for renewables. This is a long-term trend funds should pay attention to,” he notes.
Consumers have seen that companies that do not manage these issues lose money.
Simon O’Connor, CEO of the Responsible Investment Association, says there is a growing body of evidence that shows all funds’ returns are impacted by ESG concerns. He says issues such as climate change, and the Volkswagen emissions scandal, have focused investor attention on these topics.
“Consumers have seen that companies that do not manage these issues lose money,” he notes, adding that as the RIAA’s research shows, companies that do manage these issues generate heightened returns.
He says over the last few years there has been a groundswell of interest in responsible investing. “Retail investors are starting to ask how their money is being invested and are concerned about issues to do with fossil fuels, human rights, tobacco and animal welfare. Super funds have been hearing more from their members about this, which is driving their focus on the impact of their investments and what their beneficiaries want. More Australians think it’s important certain industries don’t profit from their retirement savings.”
O’Connor says over the past two years, 35 funds have divested their holdings in tobacco businesses, which is a major shift. “The question is what else do Australians feel strongly about? We encourage super funds to look into the beliefs of their members when they allocate capital.”
Questioned as to whether responsible funds have a role to play in providing capital to the fintech sector, O’Connor says traditionally Australian institutions have not had substantial exposure to early stage ventures.
“But they are increasingly investing in all kinds of assets, including venture capital and private equity funds and that includes impact investing, social infrastructure and real assets. So there is a growing interest to look at early stage ventures,” he says.