What exactly does responsible investment mean? Is there trade-off between ESG considerations (investing responsibly) and investment returns? Read on to find out more.
A growing number of Australian investors are taking a responsible approach to their investing, quite possibly without even realising they’re doing so.
That’s the reality of a rapidly evolving global investment universe, in which more and more investment products are being designed around very specific responsible investing criteria.
Added to that is the fact that investment fund managers worldwide are increasingly engaging with the companies that they’re investing in, on multiple levels, ultimately to drive long term-value creation for their end-investor clients.
According to the Responsible Investment Association Australasia (RIAA), Australia’s responsible investment market reached $1.54 trillion in 2021, up from $1.28 trillion the year before.
This represented 43 per cent of the $3.60 trillion that’s invested into the Australian managed funds sector.
To put that another way, almost half of all the money that’s invested by Australians via an investment fund manager is being invested responsibly.
Understanding responsible investment
What exactly does responsible investment mean?
Responsible investment, also known as sustainable or ethical investment, is a broad-based approach to investing which factors in people, society and the environment, along with financial performance, when making and managing investments.
The environmental aspect of ESG investing relates to how companies and industries manage their impact on the environment. This could include climate change, deforestation, pollution and waste management.
Social covers how companies and industries manage their impact on society, including their treatment of employees and suppliers, their community engagement, and their focus on health and safety.
Governance revolves around whether a company employs good governance practices, such as having gender diversity on its board and leadership team, and appropriate executive remuneration.
Five broad ESG categorisations, described below, are a useful starting point for investors to understand the variety of approaches taken by asset managers.
Exclusionary portfolio screening
Excludes companies based on their products or business activities (e.g. tobacco and fossil fuels) that conflict with certain values.
Inclusionary portfolio screening
Invests in companies or sectors considered to be more effective in the management of ESG risks, including those demonstrating meaningful improvement in the management of those risks.
ESG integration
Systematic inclusion of material ESG information in investment analysis and decision making.
Impact investing
Targeted investments with the dual objective of generating financial return in addition to positive ESG-related impact.
Stewardship
The responsible use of proxy voting and engagement activities by institutional investors to maximise overall long-term value.
Weighing up ESG investment performance
A common question asked by many investors is whether there’s a trade-off between ESG considerations (investing responsibly) and investment returns?
The weight of market evidence shows that ESG-focused products have largely moved in line with broader markets over the longer term, although it’s also evident they can outperform or underperform over shorter time periods.
For example, the recent global surges in energy prices has seen many ESG products underperform the broader market because they typically exclude listed oil and gas producers and supporting businesses.
Overall, however, ESG index fund products are designed to behave like the broader market and still provide a diversified, low-cost exposure to a large number of companies while avoiding certain ESG risks.
ESG risks and opportunities should be considered in the context of delivering long-term value and helping investors to meet their investment objectives.
To find out more about ESG investing, give us a call today. Contact us on 03 9038 9449.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
