“If an NFP is exploring investing in a company, they should view all business practices, clients and partnerships through an ESG filter.”
Responsible investing has been enjoying a steady rise in popularity over the years in Australia and at Perpetual we’ve witnessed a growing interest in environmental, social and governance (ESG) factors from our not-for-profit (NFP) and philanthropic clients, particularly on how they can apply it to their own investment portfolios.
Responsible investing is an approach that aims to incorporate ESG factors into the investment strategy, but also incorporates the values of the investor.
It is a common myth responsible investing often leads to lower returns. Sustainability is all about long-term thinking which should lead to better long-term returns for investors. Research from Morgan Stanley has shown ESG funds are regularly beating their mainstream benchmarks.
Trends for NFPs
In the NFP space, there is both a desire to align investments with an organisational purpose on one side and a need to reduce reputational risk on the other. For example, an NFP focused on fighting gender inequality would not want to be found investing in a company that lobbies for an unaligned political party.
Trends for individual investors
When it comes to individual interest, from millennials to baby boomers, men and women, there seems to be a growing personal need to generate returns that are not gained at the expense of the investor’s values. One key factor driving this interest is climate change and the rising awareness of the risks associated with drastic changes to our environment.
Our recent research, the ‘What do you care about?’ project, revealed some of the environmental factors Australians care about the most. The research highlighted 26% of Australian investors care a lot about global warming, 29% care a lot about nature, and 31% are a lot about world peace. It also revealed a quarter of Australians are showing a strong preference to have responsible investments in their portfolios.
Where to start
One question our advisers regularly face is how investors and companies interested in incorporating responsible investments into their portfolio should begin. When considering a new investment approach, it is best practice to see a financial adviser who can help you understand how to assess ESG factors when you are reviewing investment options.
Take the time to think about the things you care about the most. Establish what responsible investing means to you, what ESG factors in a company are most important to you or your organisation and incorporate them into your investment strategy. From there, investment options can be considered to both contribute and support what you see as good ESG factors, while avoiding anything you don’t support.
For NFPs looking to invest, it is important that investment decision makers consider the organisational purpose of their NFP and use this as the foundation to analyse their investment options. If an NFP is exploring investing in a company, they should view all business practices, clients and partnerships through an ESG filter. This will help ensure there is no conflict between what the NFP is trying to achieve, and the way the companies they invest in operate.
It is worth noting, if any investor or organisation is looking to do social good through their investment, they should think about their approach to philanthropy and charity separately to their investment strategy. They can then explore avenues to invest to achieve a moral outcome alongside a return.
Responsible investing is primarily about protecting your portfolio against ESG risk factors. In its simplest form, it explicitly analyses a different set of risks to traditional investing. Removing these risks from a portfolio, should boost long-term performance while still allowing investors to achieve their desired moral outcomes.
Daniel Nelson is Senior Research Analyst – Direct Australian Equities, Perpetual Private.