By Lucy Dean
Australian investors are tripping over the differences between sustainable, impact and ESG investing, and it’s robbing them of the opportunity to make their money work hard not only for their wallets but the planet, fund managers and experts say.
More than 43 per cent of the total market in Australia – about $1.54 trillion – comes under the auspices of “responsible” investing by the Responsible Investment Association Australasia.
However, responsible investment includes strategies ranging from impact investing to negative screens, and it is critical that investors understand how their money is being directed, says Jessica Cairns, head of ESG and sustainability at Alphinity Investment Management.
“Greenwashing has gotten all the focus from the Australian Securities & Investments Commission over the last couple of years in terms of fund labelling and how managers should disclose,” she says. “That’s improving awareness, but I would say there’s still a lot of confusion there.”
“There’s no standardised approach for labelling or titling funds. So you could have three funds and one could be called a sustainable fund (like ours), one could be called a responsible investment fund and the other could be called an ESG (environmental, social and governance) fund.
“They might all do the same thing and have different names, or you could have three sustainable funds that do different things with the same name.”
The Responsible Investment Association Australasia describes it as a spectrum – with traditional investment without any specific regard for ESG factors at one end and philanthropy all the way at the other.
Impact investing, the closest to philanthropy, involves investing with a dual purpose – to achieve financial returns while also stating specific positive social and environmental outcomes that their investment companies are expected to achieve.
At the other end of the spectrum, ESG integration does not involve investing to achieve a specific social good, rather simply considering ESG factors when making investment decisions.
Exclusionary or negative screening – such as refusing to feature tobacco, controversial weapons or adult entertainment in a portfolio – is considered a step up from ESG integration, while norms-based screening would involve filtering out any companies that fail to meet standards of business practice.
However, there are still more categories.
Best-in-class screening involves intentionally tilting a portfolio towards companies assessed to have the best ESG practices within their particular sectors.
Sustainability-themed investing – arguably the approach most people associate with sustainable, green or responsible-branded strategies – involves specifically targeting investment themes such as sustainable agriculture, or companies aligned with the UN’s Sustainable Development Goals.
Not an impact investing subset
Caroline Gurney is CEO of Future Generation, a fund manager that focuses on investment returns and social returns. One per cent of assets is invested in youth-focused social impact partners.
“It’s really important for investors to understand that ESG is not a subset of impact investing, and their investments into [ESG products], won’t necessarily create a direct impact,” she says.
For investors trying to navigate the different terms, Gurney says it is about getting back to basics.
“Any shareholder or any mum and dad investor has got to define what their investment goal is and then define where they want their capital to go. I think we need ESG investors to make sure that their businesses are responsible, and we need impact investors to achieve the UN’s sustainability goals,” she says.
Geri McMahon, sustainability partner at KPMG, says it can be helpful for investors to take a close look at the underlying investments of their potential responsible or sustainable portfolios.
“If I talk about responsible investment approach… that implies taking account of financially material ESG factors from a risk mitigation point of view, and that can be a useful framing for investors thinking about an approach that incorporates those factors,” she says.
“At the other end of the spectrum, impact investing is also taking into consideration those risks and opportunities from those ESG factors.
“What’s really important to understand is that in considering those approaches – responsible investing or impact investing – it’s not about sacrificing financial returns to do good; each approach requires meeting that financial return hurdle.”
She notes that in the UK, all pension schemes are required to take into account ESG considerations. That, in turn, has to some extent dispelled the myth that it was impossible to satisfy ESG frameworks while also delivering strong returns.
“What we’ve seen is that this idea of responsible investment being about risk is an idea that’s more accepted,” she says.
“And if we talk about that spectrum, on which one end is responsible investing and the other there’s impact investing – we’re starting to see investors move along that spectrum from one end to the other, and moving from responsible to sustainable to impact investor.”
The Global Sustainable Investment Alliance, the UN Principles for Responsible Investment and the CFA Institute in December formed a collaboration to harmonise their terms and definitions relating to ESG investment, due to be published in mid-2023.
“Now more than ever, it is critical that our industry falls in behind a clear and definitive set of standard definitions of responsible investment terminology and approaches,” said Simon O’Connor, chairman of the Global Sustainable Investment Alliance at the time.
“The absence of this clarity makes it harder for consumers to engage with responsible investment, and opens the door for greenwashing in our sector.”
Until there is a uniform suite of definitions, Cairns says investors’ best bet to understand where their potential investments sit is to thoroughly investigate their product disclosure statements and any sustainability charters or explanatory statements their fund managers provide.
“Investors should really be looking for … how the fund structure works, and that should be in the charter or policy,” she says.
“[Managers] should also have really clear ESG and sustainability disclosures, to be able to show how those strategies are actually implemented.
“Should fund managers be disclosing proxy voting records? Their holdings? And I would say, ‘Yes’, because as an investor, if you want to understand in practice what the PDS or the charter means, then you should be able to find the information that shows that.“