5 December 2012 – According to a leaders’ roundtable discussion in Sydney last week on how to ignite a stronger market for green and ethical investments there are a few misconceptions that need to be laid to rest.
The first mistake is to think that investments with strong environmental, social and governance agendas don’t produce strong returns. They can, and they do.
Next is the fallacy that investors don’t particularly want such investment vehicles. The reality is these vehicles are rarely offered.
Participants in the roundtable included former Liberal leader and Asset Owners Disclosure Project chair John Hewson, Premium Wealth Management chief executive Paul Harding-Davis, Dalton Nicol Reid’s CEO Harley Dalton and The Emerald Club managing director Justin Medcalf.
Premium Wealth Management’s Paul Harding-Davis said investors were often not offered investment choices with ESG credentials.
“I often hear in the adviser community that there is no demand for ESG investments, but this is a matter of advisers thinking about product rather than about solutions,” Mr Harding-Davis said.
“How many clients have asked for a small cap portfolio? I believe most clients don’t know they can ask for it, which really creates circular logic. Only three or four per cent of clients will ask for a 100 per cent ESG portfolio; but it is our view that 60-70 per cent would like some exposure once they understand they don’t have to give up returns.”
Dalton Nicol Reid’s Harley Dalton said there was a perception that you needed to sacrifice performance when choosing ESG investments, but that this focus could in fact enhance returns.
“It is not enough that an investment is sustainable – first and foremost, it needs to perform. The track record of our Australian equities portfolio demonstrates that you do not need to sacrifice performance if investing this way,” he said.
Good governance and social responsibility actually reduces risk and enhances returns because companies with poor governance and social and environmental risk can be screened out, Mr Dalton said.
“A positive bias towards companies which have a positive impact can help identify emerging growth trends such as water scarcity and security and focus on occupational health and safety”.
Asset Owners Disclosure Project Climate Institute and Shartru Capital chair John Hewson said the entire investment industry would benefit if advisers and investment managers educated their clients that they didn’t need to sacrifice performance.
“The risk of climate change is very real. However, most governments underprice this risk, just as they did with subprime market risk,” Dr Hewson said.
“Additionally, the issue of climate change has never been raised at board level in some of Australia’s largest investment houses. And only a very small percentage of insurance boards have addressed the issue adequately.
“Our directive with AODP is to name the groups who are not addressing climate and empower beneficiaries and trustees to demand that they do. We believe transparency and accountability in this regard are inevitable.
“It is my view that the best hedging against climate change is to invest in low carbon to offset high carbon. Generally investors don’t get a lot of information about this issue; the media is largely ignoring it and super returns remain flat. Why would they care?
“But if investors are educated that they can invest responsibly and not sacrifice performance, then I believe there would be far more demand for these types of investments.
“There is a revolution underway whereby businesses are developing new technology that has a far less negative impact on the environment, so lots of businesses harnessing this technology will perform exceptionally well. Ensuring your clients have access to these investments can help build returns and protect them in the future.”
The Emerald Club managing director Justin Medcalf said his business focused on the estimated 20 per cent of investors who used a financial advisor.
“Unfortunately, most advisors are not comfortable talking about climate change. It is frightening for many and there remains a very high level of scepticism. However there is a rumbling under the surface and there I believe there will be a serious mindshift. It is good to see this pressure mounting.”