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Australians move towards ethical and sustainable investing

Increasingly, super funds are adopting responsible investment practices to help build and safeguard long-term returns for their members – and invest in a better future for all.

In 2019, a nationwide survey found that an overwhelming number of Australians (78%) were worried about climate change*  – a concern which escalated in 2020 as Australia faced one of its worst bushfire seasons ever. This was followed by the outbreak of Coronavirus, which laid bare the effect of insecure work and poor-quality housing on many Australians. So it’s no surprise that more investors are looking critically at how companies are managing their environmental and social responsibilities. 

Responsible, ethical or sustainable investing – putting your money into companies or sectors that are aligned with your values – has been around for many years. But it’s only become part of mainstream investing recently, as more of us realise the power that investing has to change society for the better. And investment managers and super funds are taking note. Of the $3.1 billion that is professionally managed on behalf of Australians, 60% is looked after by investment managers or super funds who adopt responsible investing practices*.    

Sustainable super

To make a difference yourself, you don’t have to directly buy shares in windmills, batteries or social housing. The money you put into your super fund can make a positive impact if your fund invests responsibly – choosing companies with strong social or environmental credentials and avoiding potentially harmful ones.

One of the most common classes of responsible investing is known as environmental, social and governance (ESG) investing. ESG is a valuable tool that combines research, analysis, selection and investment monitoring. It allows super funds to screen an investment not only for its ability to generate financial returns, but also for its impacts on the environment and society.

With ESG investing, super funds measure companies against key environmental principles and decide to avoid or divest from those that score poorly – such as companies that are highly polluting. They may also use ESG to identify companies that are helping decarbonise the economy, like wind or solar farms.

Similarly, super funds may screen a company for its positive social impacts, such as fair labour standards, or those whose practices can harm society – tobacco or weapons manufacturers, for example. Just as importantly, ESG investors analyse a company’s governance, avoiding those with records of corruption or anti-competitive practices, and favouring companies that have transparent processes and diverse boards.

As well as considering a company’s ESG record, super funds may also look closely at any climate-related risks that could affect the company. For instance, a company’s production and operations could be affected by an increase in extreme weather events – which could then reduce its revenue and therefore the value of its shares.

Good outcomes without sacrificing returns

Investing responsibly using ESG isn’t just about doing the right thing – it can also make financial sense. For example, investing in new areas like green hydrogen could help lower carbon emissions. At the same time, because these technologies are poised to grow, such investments could provide attractive returns. Using ESG principles can also help avoid old, increasingly unprofitable technologies as Australia transitions to a low-carbon economy.

While past performance doesn’t guarantee future returns, it’s worth looking at how funds with an ESG focus have performed compared to other funds. Research shows that over 10 years to 31 December 2019, Australian share funds applying responsible investment practices had 2.2% higher returns, on average, than the average return across all comparable funds.  It’s likely that this distinction will be even greater for 2020, given that many ESG funds have a high investment allocation to technology and healthcare companies, and these are two industries that did particularly well during the Coronavirus pandemic.  

Our approach to ESG

We’ve been embedding ESG and climate-related factors in our overall investment strategy for many years now. In 2017, we signed the United Nations-supported Principles of Responsible Investment. As signatories, we are committed to considering ESG issues in all our investment analysis and decision-making processes, as well as our ownership policies and practices. We also ensure that the companies we invest in disclose information about their ESG credentials. And we’ve agreed to promote acceptance and implementation of ESG principles within the investment industry*. 

ESG principles guide every step of our investment process. They inform how we identify and the ESG and climate risks and opportunities in each portfolio – and how our investment managers are managing them. They also mean that we engage with investment managers to address any ESG risks in our investments. We report internally on any ESG and climate risks we identify, and act transparently by disclosing those risks. And we seek to monitor, manage, reduce and mitigate these risks over time*. 

By using ESG principles to guide our investment approach, we’re not only doing the right thing. We’re also committing to put our members’ best interests first, and to drive sustainable shareholder value over the long term. We believe companies that manage their ESG and climate risks responsibly are more likely to perform strongly in the long-term. In doing so, they can also deliver stronger returns for our members. 

Find Out More

Your super is there to help you enjoy retirement on your terms. For many of us, this includes having the peace of mind that our investments are doing the right thing for society and our environment.You can find out more about Colonial First State’s Responsible Investment Policy. You can also ask your financial adviser about how you can invest in line with your personal values. 

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.