Provided by Mercer: 11/2/08
If 2007 was the ‘tipping point’ for awareness of responsible investment, what is the outlook for 2008?
A lot has happened in the world of responsible investment since 2006 when Al Gore paced the stage in An Inconvenient Truth. Responsible investing, or RI, is now a mainstream consideration for companies, super fund trustees and increasingly, individuals.
At 30 June 2007, the UN Principles for Responsible Investment (PRI) group of large institutional investors had 183 signatories representing $11 trillion globally1. Locally, Australia has ratified the Kyoto Protocol which will influence how fund managers, super trustees and boards invest.
In this article, we’ll look at six emerging trends for 20082. We’ll also provide an update on a continuing question. Do assets managed with RI principles actually outperform other investments?
Let’s begin with a definition. RI is the integration of environmental, social, and corporate governance (ESG) into investment management processes in the belief that these factors can have an impact on financial performance. Specifically, for institutional investors, RI is consistent with good governance and strategic leadership. It’s also about managing risk and advancing sustainable investment opportunities. This is not the same as ‘ethical’ investing where certain companies are excluded from your investments.
Responsible investing trends for 2008
Based on its global expertise working with large investors and as a UNPRI signatory, Mercer has identified six RI trends for 2008:
- Emergence of clean technology – Concern about global warming is expected to continue the growth in ‘cleantech’ investing. Water projects and green property are two sectors of note. Overseas, public pension plans will lead the way followed by foundations and corporations. More research is needed however, to detail the associated risks, opportunities and qualities.
- RI in super – Many Australian super funds already consider RI principles in their approach. In Australia and New Zealand there are 50 signatories to the UNPRI, including many of Australia’s largest super funds. Mercer expects member demand for responsible investment in a range of asset classes, not as a segregated option, to increase and this is mirrored among overseas defined contribution pension plans.
- Demand for robust company reporting – Mercer believes increased public awareness of environmental and social issues will drive demand for improved corporate transparency and reporting standards. (This in turn, may impact how investment analysts value companies.)
- ESG to span asset classes – We anticipate there will be continued innovation among fund managers who wish to integrate ESG across a range of asset classes. These include listed equity markets in developed economies, emerging markets investments, fixed income and alternatives.
- Fund managers under ESG scrutiny – As super funds and individuals focus increasingly on RI for their portfolio, Mercer expects fund managers will come under greater pressure to demonstrate their ESG credentials.
- Gen X and Gen Y investors – Growing public awareness of ESG and the emergence of younger generations with high levels of disposable cash, is facilitating a surge of RI interest among Gen X and Gen Y investors. Mercer believes family foundations may increasingly apply ESG approaches to their portfolios while young investors will be on the look out for the latest retail products.
While ESG has entered the mainstream, questions remain about its ability to deliver consistent financial returns in the long-term.
Late last year, Mercer and the UN released a report called Demystifying Responsible Investment Performance which analysed 20 pieces of academic work and 10 key broker studies on ESG factors3. Of the former, 10 found a positive relationship between ESG factors and performance, seven neutral and three negative. Overall, the report concluded that “taking wider factors into account in the investment management process, such as ESG factors, did not appear to bring a performance penalty”.
Responsible investing returns
Recent performance data for retail RI funds seems to support this idea. Mercer’s survey of returns for IDPS Australian Shares funds (before tax and after management fees) to 31 December 2007 is educative4. Over five years, the median RI fund returned 22.4 per cent compared to 20.7 for the median Australian Shares5. Over the same time period, the median Overseas Shares RI fund returned 6.2 per cent compared to 7.7 per cent for the median6.
It’s important to note the RI funds recorded returns that were neither the highest nor the lowest in the survey. Also, there are limits to making an assessment on performance return data alone. For example, the data is purely historical and past performance is never a guarantee of future return.
Incorporating responsible investing into your own portfolio
So how might you include ESG into your own portfolio investments? Well, if you are keen, there are two things to condsider.
Firstly, the constantly evolving RI landscape means you’ll need access to thorough and timely investment research. Remember, if you’re looking for superior RI returns you’ll need to identify and access the high quality investment managers.
Secondly, you’ll need a strategy. The key to RI is in striking a balance. You should aim to realise your financial goals while concurrently satisfying your ESG principles.
A licenced, or appropriately authorised, financial adviser can help you find that balance. To speak with a Mercer financial adviser about your investment strategy, call us on
1800 633 403.
More information
mercer.com.au
mercerwealthsolutions.com.au
asic.gov.au
1 IFC and Mercer launch first sustainability survey, mercer.com, accessed 4 February 2008, published 29 November 2007.
2 Jane Ambachtsheer, Mercer, “We’ve passed the ‘Tipping Point’ – 2007 in review and outlook for 2008”, published 7 January 2008, accessed 4 February 2008.
3 Mercer, “Responsible investment doesn’t hurt returns: UNEP & Mercer report reveals”, Accessed February 2008, published 24 October 2007, mercer.com
4 Mercer surveys, IDPS Australian Shares-Return for periods ended 31 December 2007, mercer.com.au, published January 2008.
5 Mercer surveys, p.9
6 Mercer surveys, p.13
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
