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Responsible investing: a new era

Think investors need to give up returns in exchange for responsible investments? Think again.

       Written by Tamikah Bretzke
Colonial First State
   

According to Colonial First State’s Caroline Paterson (Senior Manager, Responsible Investment), that is simply no longer the case – particularly as investing has entered an era where environmental, social and governance (ESG) considerations have moved into the mainstream and now contribute to the expected minimum standard of what is considered good investment practice in Australia.

 

“It’s a myth that investors need to give up returns in order to invest responsibly,” Caroline begins. “Research has revealed that responsible investment funds have actually outperformed mainstream funds over most timeframes and asset classes.” As the responsible investment market continues to grow, there has been more participation from investment specialists than ever before – particularly since influences such as the climate emergency have driven demand from investors wanting to know their investments are being managed in a sustainable and responsible way. “Necessity is the mother of change,” Caroline muses. And what this has meant over recent years is increasing access to superannuation investments that allow members to achieve both positive impact and long-term financial returns.

 

As a mother herself, Caroline says the point of responsible investing is not simply to deliver financial returns, but to also contribute towards providing people with a future that they’ve worked all their lives for – one that even her children can enjoy in retirement. “Responsible investing is well and truly putting members at the centre of what we do,” she says. “Super is a long-term product, so we have to invest for the long term – and that requires a sustainable approach.”

Companies actively searching for ways to improve their investment processes are likely producing better outcomes.

Having worked with Colonial First State for two decades, Caroline’s expansive view of the business has made her well-placed to consider the team’s own approach to sustainable investing. The most fundamental problem, she says, is that the financial services industry lacks a global framework that outlines the universal meaning of responsible investing. “We’re not all talking the same language,” she explains. “What we need are guidelines for collectively understanding all the terminology in the industry, which could have different meanings to different organisations – including our own.”

 

Caroline says that being clear on what responsible investing means to organisations could, in turn, help them to be more transparent about the actions they’re taking to become more responsible investors. However, she also asserts that transparency can present its own challenges. “In the past, we’ve seen some companies publicly disclose that they’re working to correct certain issues they’ve identified in their supply chains or operations – only to have some investors react with, ‘we want nothing to do with you’,” Caroline reflects. “In reality, those companies are likely producing better outcomes because they’re actively searching for ways to improve their investment processes.”

Just under half of all professionally managed assets in Australia now employ responsible investment strategies…

Likewise, Colonial First State is working hard to align its investment process with the evolving responsible investment space. The Investments team collaborates with some of the country’s leading investment managers to skilfully identify the risks and opportunities in markets on behalf of more than a million Australians. And with more than a hundred investment options available, Caroline says it’s important that the team actively engages with its investment managers, where it can, to ensure ESG considerations have been factored into the decision-making process – something that was once not always the case. “On one occasion, we found that an investment manager had a small holding in a particular stock that contributed to roughly one third of his portfolio’s total carbon footprint,” she explains. “When we approached him about it, he realised that there were other similar stocks he could consider that not only had a lower carbon footprint, but which also offered the same kind of returns.” According to RIAA’s Responsible Investment Benchmark 2019 report, responsible investment has continued its upward trajectory into the mainstream – with just under half of all professionally managed assets in Australia now employing responsible investment strategies.

It’s exciting to see more people innovating and learning in this space.

As the industry continues to transform, so too will conversations surrounding responsible investing, and the tools available to managers for gauging the potential pitfalls and possibilities in investing. According to Caroline, the responsible investment industry has already begun to change. “I’ve been to conferences over the last three or four years, and the number of investment specialists attending has grown considerably,” she says. Interestingly, so too has the number of men engaging in this growing, largely female-dominated field of financial services – where women are said to account for some 65% of ESG-related roles.1 “There are a lot of skilled women working in this space who have been so willing to share their knowledge, from the likes of Elaine Prior to Dr. Bronwyn King,” Caroline says. “Regardless of gender, it’s exciting to see more people innovating and learning in this space.”

It’s important that we divested responsibly and turned to investments that didn’t compromise on returns.

Looking ahead, the Colonial First State Investments team will work towards harnessing a range of tools to measure the potential climate risks associated with investment portfolios – opening the door to a realm of new research that could further the team’s understanding of ESG factors and optimise the way it invests. “This is new for everyone, and there are different tools emerging to investigate different things,” Caroline says. “For example, we could not only put portfolios through different scenarios to see how a warming climate might impact them, but we can even investigate – down to the stock level – what holdings are contributing to a portfolio’s carbon footprint and what influence different asset classes might have on the environment.”

 

While Caroline says there is still a long way to go, she’s excited about the work Colonial First State is undertaking to invest more responsibly on behalf of members – in addition to the team’s complete divestment from companies associated with the production of tobacco and controversial weapons. “One of the biggest differentiators of Colonial First State is that we’ve divested across our entire product suite – not just certain products,” Caroline concludes. “It was a lengthy process, but it was important for us to make sure we were divesting carefully for members and, more importantly, that we replaced their investments with sustainable opportunities that didn’t compromise on returns.”

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. CFSIL also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36.