Investments need sustainable approach
The catastrophic bushfires that swept through Australia this summer sparked a renewed interest in investor-led solutions to climate change.
The Responsible Investment Association Australasia reported a surge in visitors to its consumer site in January, with investors searching for financial products that invest in “renewable energy and climate change solutions”.
Mercer Investments Market Analyst Yaying Dong says the heightened attention on climate change and the need for sustainable energy solutions could represent a lasting change for the Australian economy. It could also be a catalyst for investors to make serious changes to their portfolios, driving them to transition through time towards less environmentally intensive industries and or pursue investment in new technologies to better manage environmental outcomes.
“I think the biggest risk for investors in relation to climate change would ultimately be stranded assets – having money invested in holdings that are not sustainable for the environment,” Dong says. “That could have a fairly large impact for investors, particularly in areas such as coal, manufacturing and electricity generation.”
Responsible Investment has a positive impact on both returns and society
Jillian Reid, a principal in Mercer’s Responsible Investment team says the approach expects to deliver better risk and return outcomes because it looks forward and incorporates environmental, social and governance (ESG) factors that are not captured in historical data sets and traditional investment methods.
Mercer is a leader in responsible investing, particularly regarding climate change which carries the risk of both environmental damage and the costs of transition to a low-carbon economy.
"When Mercer looks at investment opportunities, we're looking at sustainability from a risk and return point of view,” Reid says. “We believe ESG factors have a positive financial impact and we want to reduce the risks that come with environmental and social challenges."
A key step in Mercer’s responsible investment approach is to appoint fund managers with the ability to analyse a long list of ESG factors to identify which ones might pose a risk to a given company and how well that company is managing them. These factors can propel companies into the news, the regulator’s inbox and even the courts, all of which can put customers off and impact on share prices.
“We believe investors like super funds should be active owners of the assets, because it makes sure those companies deliver returns in line with shareholders’ best interests, and those shareholders include all of us as super fund members” Reid says. “Companies can get caught up in quarterly earnings cycles and annual bonus cycles and we remind them that our expectation is not just short-term speculation, we’re investing for the long-term.
“We have conversations with the fund managers we appoint and the companies we’re invested in, asking questions to determine if the board is paying attention to strategy? Are there risk management processes in place? Are they aware how customer expectations are changing?”
Responsible investment criteria are applied across all investment options within the Mercer Super Trust, integrating ESG factors, being active owners, investing in sustainability solutions, and excluding tobacco and controversial weapons. The fund also offers seven specific options – which have a higher proportion of sustainably themed assets and higher ethical requirements, excluding companies involved in alcohol production, fossil fuels, gambling and pornography.
Investing in Values
Australians care deeply about many social issues like human rights, animal cruelty, weaponry, gambling and other addictive products. Environmental issues like climate change, food and water security, waste and plastics pollution, plus biodiversity and habitat loss are also of huge concern to a growing number of Australians.
Despite that, we have been slow to connect the dots between our values and where we invest our money, particularly our retirement savings. Few Australians look closely at the environmental and social credentials of their investments but expect to retire into a world they will be able to enjoy.
The Responsible Investment Association of Australasia’s From Values to Riches 2020 research on consumer expectations showed that 86% of Australians expect their super to be invested responsibly and ethically and 62% expect ethical or responsible super funds to perform better in the long term. The 2019/2020 summer also prompted environmental issues to be of greatest concern.
“Food and clothing are tangible, everyday items that people can relate to when making ethical choices as consumers,” Reid says. “Financial products are far less visible and harder to make Instagram-appealing.”
But given close to $3 trillion is invested in superannuation in this country, anyone in a fund has the opportunity to influence improvements.
“Australians don’t always appreciate that they are part-owners of all of the companies listed on the Australian Securities Exchange, the buildings, the airports and toll roads,” says Reid. “If people asked a few more questions and raised their expectations, they could have some significant influence in better connecting our values to generating value.”
To learn more about Mercer’s approach visit our Responsible Investing page