Majority of Aussies want to invest ethically after summer bushfire crisis

Environmental, social and governance investing (ESG) has come to the fore in recent years as people consider the risks and opportunities when it comes to the impact their super and investments have on the environment, human rights and other issues.

Consumer sentiment, how optimistic people feel and their finances and the state of the economy, is moving faster in some ways than product and service development. A majority of Australians expect their savings and super to be invested responsibly and ethically, and would consider moving to alternative providers who do so, according to new research commissioned by the Responsible Investment Association Australasia (RIAA).

The report From Values to Riches 2020, indicates that 80% of those surveyed feel environmental issues are of greatest concern when investing.

RIAA CEO Simon O'Connor links the concern about environmental issues to this summer's bushfire emergency,

"Consumer expectations and norms are shifting," O'Connor says. "There is an upswing connecting bushfires to climate change to where Australians are investing their money.

"I think there's a real risk that the financial services sector doesn't keep up with that fast moving consumer expectation on the role of finance addressing climate and the great challenges of our times, such as global pandemics."

The coronavirus pandemic could, in the same way, lead to health-related concerns, he says.

But as ESG investing increases, will making investment choices that avoid companies that have poor ESG investment performance in favour of investments that have stronger ESG performance means sacrificing returns? Over the past decade, through mostly bull markets the answer has been "yes".

According to the March 2020 statistics for Rainmaker Information (which publishes Money and The Sustainability Report) Vantage Point chart packs, over the past 10 years, the ASX200 gained 4.9%pa, while the MSCI Australia ESG Leaders index gained 5.3%pa. In international equities, the MSCI All Countries ex AU Local Currencies gained 8.0%pa over the past 10 years, but the MSCI ACWI SRI index gained 3.4%pa over the past 10 years.

But how are these strategies performing in light of the impact of the coronavirus pandemic?

Recent data provides a snapshot and more time is necessary to test the long-term performance of ESG-aware indices and funds, but initial information shows that ESG integrated indices are performing relatively in line with wider benchmarks.

According to the March 2020 statistics for Rainmaker Information's Vantage Point chart packs, the ASX200 lost -20.7% for the month, while the MSCI Australia ESG Leaders index lost -21.3%. In international equities, the MSCI All Countries ex AU Local Currencies lost 12.6% for March, but the MSCI ACWI SRI index lost 10.7% for the month of March.

It is difficult to pinpoint exactly why ESG strategies are performing as well, or relatively better than strategies that do not explicitly select investments based on their ESG performance, but fund managers point to a couple of factors.

Some ESG strategies screen out fossil fuels, or underweight fossil fuel companies, so when the oil price war broke out earlier this year between Saudi Arabia and Russia, those strategies were insulated from market volatility in that sector. Other strategies have avoided the big four banks over culture and conduct concerns, so they were similarly unaffected by the volatility that has hit the banks as a result of the findings of the banking royal commission.

A third potential consideration is that companies with strong performance in managing ESG issues also tend to be companies with larger market capitalisation, and strong quality characteristics like profitability, strong balance sheets and more resilient leadership. Those companies would tend to have lower volatility and stronger performance in a volatile market as well.

Index provider MSCI believes that, after controlling for factors such as quality, momentum, beta, profitability s, there is a discernible percentage of performance that could be attributed to an idiosyncratic ESG factor.

While it may be too early to come to definitive conclusions about how ESG strategies perform in unique circumstances that combine an international health crisis with a financial crisis, the evidence will mount.

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