There’s no doubt that green and ethical investments are the flavour of the month. Many of us hope they are the flavour of all time, and the sooner the better.
The signs are good, business is booming at the big end of town and it’s also growing fast at the mum and dad and young Millennials level.
Our recent article on the sector pointed funds under management now worth about $622 billion.
Sydney Responsible Investment Association’s chief executive Simon O’Connor told a media briefing at the Australian Ethical offices in Sydney earlier this month that the sector grew at about 1.5 per cent for decades but growth since 2013 has been at 4.5 per cent.
“We firmly believe it’s on a trajectory that will keep increasing; it will hit 10 per cent in next one to two years,” he said.
This means a number of things, not all good.
Like any other sector, sustainability will have its natural bell curve distribution of good people, the ordinary and the five per cent or so who can’t or don’t want to play by anyone else’s rules.
That bottom end of the curve is tricky enough to handle when it comes to solar installations or the disastrous insulation scandal of a decade ago.
But when it comes to looking after the savings and pensions of people who want their money to do well for the planet and their fellow humans, as well as themselves, the issue gets hypersensitive.
Everyone will be watching.
Not the least the long-term players.
In recent times there’s been an influx of new ethical managed and superannuation funds, some targeting Millennials who are known for their inclinations towards ethical investing, but also for their weakness for technology.
We wrote about Morphic Ethical Fund in April. This offer made a big splash with its beautiful website, lovely organic images and a mantra that says “Change Creates Opportunity”.
There are also groovily named outfits such as Zuper, Human Super and Mobi Super.
Then there’s Spaceship super backed by Atlassian’s uber-cool Mike Cannon-Brookes, which is specifically targeting the Millennials with tech offers.
It must be at least mildly annoying for the ice breakers such as Australian Ethical that have been plugging away for 30 years in the sector to now watch a bunch of newbies enjoying the relatively easy pickings in a primed and ready market.
Perhaps annoying but not the main thing, if you ask Australian Ethical chief executive Phil Vernon.
Speaking at the briefing, Vernon spent some of his presentation explaining how his company had reached growth of nearly 40 per cent a year in terms of funds under management and invests 10 per cent of its profits to philanthropic causes.
But he also wanted to add his voice to growing concerns around the practices of some newcomers to the super industry.
In particular, high fees of some offers, the focus on narrow investment sectors and the trend for the people marketing the products to be separate from the trustees who hold legal responsibility for investors’ money.
Other observers have honed in on the propensity of the new players to leverage their social media and tech skills to influence perceptions.
Vernon’s own company can boast 100,000 Facebook followers and it’s a matter of pride that this number is way above that of competitors, so in his view there is nothing wrong with using technology as a tool.
“I guess good on them because there is disengagement with super so these funds are trying to spruce things up a bit and target a particular sector and be innovative in their approaches,” he said.
But technology needs to be seen as an enabler. “Not the reason you choose a super fund.”
What is important is being transparent about how super is invested and communicating this, he said.
And to be fair the industry does itself a disservice with its “jargon and awful language”.
“And we absolutely support innovation.”
What’s more important is that “the fundamentals have to be there”, and concerning is that some of the promoters of the super fund start-ups are not the trustees of the product.
“We think if you promote a product you should take long-term accountability.”
Vernon says there is not necessarily “a case to investigate … but I think there is an issue to investigate for the long term. Accountability is very important.”
In a phone call later to expand on the issues Vernon said the problem with separation of marketers and trustee is that people might be attracted by a personality or to the way a person is promoting the offer.
So if accountability is key, “dispersing” the trusteeship is dispersing the responsibility.
“The person selling the product has motivation for growth. Why that doesn’t work in my view is because that party’s commercial motivation is to get as many clients as they can.
“The reason that doesn’t work over time is that looking after members’ interests over the long term is very complicated.
“We talk about it constantly. Issues arise in terms of investment ethics, how we’re spending members funds for marketing.”
Vernon won’t go into details but says some of the statements he’s heard from newcomers are concerning.
“They seem to have constructed a narrative around appealing to certain interests of Millennials…”
“Some are taking advantage or trying to appeal on the ethical side; appealing to a very narrow set of interests around particular stocks.”
Being ethical isn’t enough, he says.
What’s desirable is having “multiple options across all risk profiles and a clear stated strategy for getting fees down as you grow”.
Strident criticism of some new offers, Spaceship in particular
Other observers have been more strident in their criticism.
Actuarial research house Rice Warner recently warned of “inefficient predators” in the market.
The company said many people enticed into the new products were simply ill-informed.
“There are many new funds (offered by a few trustees) who spend far more on recruiting members than delivering long-term value,” Rice Warner said.
Spaceship has come in for the strongest attention, not surprisingly perhaps because of its association with the high-profile Cannon-Brookes and the power of his personal brand.
The super fund particularly targets technology stocks such as Google and Apple.
Rice Warner’s Michael Rice told The AFR recently, “It doesn’t sound like a good proposition to me … Spaceship appears to be charging more and taking on more risk with a lower objective of projected returns than a MySuper product.
“Spaceship’s annual fees are twice that of non-profit industry funds while their stated return target of 2.5 per cent above the consumer price index is well below other comparable super funds. The current inflation rate implies a four per cent annual return. A comparable Australian super product targets 3.85 per cent above inflation,” the report said.
To be fair Cannon-Brookes claims Spaceship fees will come down as the fund grows and takes advantage of economies of scale.
“If Spaceship could just get more people to think about their super, the venture would have succeeded,” he said.
“You get your Vodafone bill and it’s ‘f— it’s $100 a month’. Dude that’s so irrelevant compared with this.”
Morphic has also been criticised for high fees.
Ethical screens are not enough
Vernon says you don’t just need a track record in investment, you also need what he calls “fully featured products”, which means having options to cater for all the risk profiles the customers might want now, and as they age.
“If all you have is a balanced option, it’s very narrow. If you are young, you need high growth and if you’re old you need conservative options.”
Ideally, you also need access to international assets and all asset classes plus fixed income and international equities, property alternatives, and ability to “mix and match as you get older”.
“It’s not enough just to be ethical.
“You might need Aussie shares in an ethical fund but you might also need a bit more international or a bit of fixed income. And suddenly you can’t get access to it.”
And in the end he’s got a point. We’ve all seen well-meaning people flounder. Even with the best of intentions the market can be savage. And coming up soon is the traditional “black” month of October, which for some reason has been the month of the biggest stock market crashes.
It’s a tough game this green investing. Hard enough on regular terms but for the green investors who’ve cared more for the planet than their own bank balance it can be a minefield and very hard to keep up.
You need to be green, not a greenhorn.