Responsible Investment. Doing good or doing really good? Adviser - - PowerPoint PPT Presentation

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Responsible Investment. Doing good or doing really good? Adviser - - PowerPoint PPT Presentation

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Responsible Investment. Doing good or doing really good? Adviser Big Day Out April 2010 1 Disclaimer Please be aware that this presentation provides general information only, and is specifically for the purposes of professional review of the

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Responsible Investment. Doing good or doing really good?

Adviser Big Day Out April 2010

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Please be aware that this presentation provides general information only, and is specifically for the purposes of professional review of the investment capabilities

  • f Australian Ethical Investments Limited. It is not intended for general

distribution or use by advisers and personal investors. You should refer to a copy of the Product Disclosure Statement and our website before considering investing. Units in the Trusts are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, Australian Financial Services Licence No. 229949). Interests in the Australian Ethical Retail Superannuation Fund are offered by Australian Ethical Investment Ltd by arrangement with its subsidiary and Trustee of the Fund, Australian Ethical Superannuation Pty Ltd (ABN 43 079 259 733, Registerable Superannuation Entity Licence No. L0001441). The registration number of the Australian Ethical Retail Superannuation Fund is R1004731.

Disclaimer

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Outline

  • Who are Australian Ethical Investment and

Superannuation and what do we do?

  • What is the world of Responsible Investment?

– What types? – What are the drivers?

  • The old question ­ does doing good do well?
  • What are the opportunities for advisers?
  • Is there training available?
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Business and Products

Parentage

  • Australian Ethical (AEF) listed
  • n ASX October 2002
  • Australian Ethical Super –

subsidiary of Australian Ethical Investment Ltd

  • CAER – formerly part of

Australian Ethical, now an independent stand alone non­

  • profit. Retains a close

partnership with Australian Ethical, including sharing office space

Centre for
  • Aust. Ethical
Research (CAER) Australian Ethical Investment Australian Ethical Super
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Business overview

Doing good has been a good business model

  • Debt free
  • Profitable
  • High retention rates
  • Specialised boutique
  • Outstanding performance
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Business

Product Overview

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The World of Responsible Investment

Ethical/SR Investment ­ a broad church

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The World of Responsible Investment

WHAT IS RESPONSIBLE INVESTMENT?

  • Responsible investment is an umbrella term used to describe

an investment process which takes environmental, social, ethical or governance considerations into account.

  • There are a range of terms used today. Many of these terms

will be familiar such as:

– ethical investment, – green investment, – sustainable investment, – socially responsible investment, – clean technology investment or simply, – “SRI”.

Source: RIAA – Responsible Investment Association of Australasia
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The World of Responsible Investment

HOW DO RESPONSIBLE INVESTMENT PRODUCTS DIFFER?

  • Responsible investment products differ from other investment

products because they systematically take environmental, social, ethical or governance considerations into account when making investment decisions.

  • Responsible investment products can differ from each
  • ther in the way in which they take these issues into account.

Typically a responsible investment product will manage environmental, social, ethical or governance issues using one or more different practices.

Source: RIAA – Responsible Investment Association of Australasia
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The World of Responsible Investment

Different complexions – types of screens

  • Negative Screen avoids investment in certain sectors and stocks
  • Best of Sector does not avoid any sector or stock and favours best

performance in each sector

  • Corporate Engagement/Shareholder Activism attempting to engage

corporations at a board level or using proxy voting to make change

  • A Positive Approach actively seeks to identify and support beneficial

endeavours

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Growth of SRI Market – 1995 to 2007

  • In the United Sates $2.71 trillion of funds are under SRI mandates. This represents

approx 11% of the full market of US$25.1 trillion. Growth is strong at 324% over the 1995 to 2007 period vs. 260% for the broader market

  • In Europe €2.665 trillion of funds are under SRI mandates. This represents as

much as 17.5% of the asset management industry in Europe.

  • In Australia AUD$17.1 billion are under core SRI mandates. This represents approx

1.87%

– From 2004 to 2007, managed responsible investment portfolios have grown from $4.5 billion to $17.1 billion, an increase of 380%
  • SRI / ESG investing is becoming much more mainstream globally and much of the

growth has occurred at the broad level whereby fund managers, pension funds and mainstream investors have incorporated ESG into their day to day investing activities

– Sources: Social Investment Forum, 2006, Eurosif, 2007, RIAA Benchmarking Report, 2008 and UN PRI

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

Drivers of RI

Global growth

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Region Signatories AUM $bn

Africa 24 298.85 Asia 32 1,478.64 Europe 230 12,954.10 Latin America 30 174.90 M iddle East 3 N/A North America 111 4,528.53 Oceania 96 663.37 GLOBAL TOTAL 526 20,098.39

Signatory type Signatories AUM

Asset Manager 247 15,886.55 Asset Owner 176 4,211.84 Service Provider 103 N/A TOTAL 526 20,098.39

The Principles for Responsible Investment (PRI) were launched in April 2006 to signify a commitment from investment institutions to develop their application of ESG factors across their investment portfolios (not just specialist responsible investment products) Three of the four largest fund managers in Australia and New Zealand have also signed up: BT Financial Group, AMP Capital Investors and Colonial First State Global Asset Management

Drivers of RI

United Nations Principles for Responsible Investment (PRI).

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Drivers of RI

Over 80 Australian UN PRI Signatories

Principles:

  • 1. We will incorporate ESG issues into investment

analysis and decision­making processes.

  • 2. We will be active owners and incorporate ESG issues

into our ownership policies and practices.

  • 3. We will seek appropriate disclosure on ESG issues by

the entities in which we invest.

  • 4. We will promote acceptance and implementation of

the Principles within the investment industry.

  • 5. We will work together to enhance our effectiveness in

implementing the Principles.

  • 6. We will each report on our activities and progress

towards implementing the Principles.

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Australian First Advocacy Fund

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CLIMATE ADVOCACY FUND (CAF)

Retail and institutional investors who want an index like return and want to have their voice heard/pursue the UNPRI principles. Who?

  • Passive portfolio construction using “economic footprint”

weighting

  • Explicit legal obligation on RE to pursue “ESG charter”

aims How? “To benefit investors, society and the environment” Why? A fund whose mission is to match or slightly better index returns and pursue improved ESG performance What?

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Drivers of RI

Risks to company profits

“Worlds top firms cause $2.2tn of environmental damage, report estimates”*

Study of world’s top 3000 companies carried out by Trucost­ what does it mean in corporate terms?

– Equates to 1/3 of company profits – Aim of study to help investors make better decisions

* Guardian.co.uk, Thur 18 Feb 2010

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Drivers of RI

Fiduciary duty – Cowan v Scargill

Clayton Utz – Australian Superannuation Law Bulletin 2008 19(10) SLB “We agree with more recent commentators who have suggested that the decision in Cowan has been distorted, over time, to support the view that it is unlawful for Trustees to do anything by seek to maximise profits for their beneficiaries. On a proper reading of the case it does no such thing, but rather stands for the more modest proposition that Trustees must act for the proper purpose of the Trust and not for extraneous purposes.” “The judge himself has subsequently expressed the opinion that it did not support the thesis that profit maximisation alone was consistent with the fiduciary duties of a Trustee.”

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So, is “doing good” a good thing for investors?

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Does doing good do well for investors?

Is this your primary question?

  • Question was asked by two Queensland University

academics

– Dr. Darren Lee and Dr Jacquelyn Humphrey

  • Where to start?
  • The first question they ask is – do conventional funds
  • utperform?
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NOT Really

Simply no body of evidence to support the claims that conventional funds outperform net of fees

Does doing good do well for investors?

Do conventional funds outperform?

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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One view ­ screening stocks restricts the investor’s universe and results in less diversification benefits and investment

  • pportunities, thereby resulting in a new “less efficient”

investment frontier. Therefore: ESG harms performance

NB: This is an issue for ALL ‘screened’ portfolios (i.e. growth/value, large/small, domestic/ international, high/low PE, PB, div yield etc).

Risk Return Markowitz Frontier Moskowitz ESG / SRI constrained Frontier

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

Does doing good do well for investors?

The main –ve argument?

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Companies are not only responsible to shareholders, but to a variety of stakeholders who have a stake in the performance (both financial and social) of the firm (Freeman, 1984). Therefore: ESG helps performance

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

Does doing good do well for investors?

The main +ve argument – Stakeholder Theory

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A critical assessment (based on research) on ethical strategies’ performance versus mainstream

  • Index based studies
  • Sauer, 1997 (DSI), Statman, 2000 (DSI), Statman, 2006 (DJSI US, DSI, Citizens Index,

Calvert Social Index). Each find no difference between SRI and conventional benchmarks (i.e. S&P500, DJGI, MSCI etc)

  • Derwall et al 2005 analyse best / worst eco stocks/portfolios and find best outperform

worst even when controlling for risk etc

  • Lee 2007 & Lee and Faff (2009a) find that the best SRI firms have much lower risk

relative to worst CSP firms (as much as 49% less risk). However, no difference in performance relative to global market.

Does doing good do well for investors?

First of all – Do SRI / Ethical strategies outperform?

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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  • In terms of (risk­adjusted) performance,

evidence from the best studies suggests it does not appear that there is a penalty for investing in SRI funds

Does doing good do well for investors?

First of all – Do SRI / Ethical strategies outperform?

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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NOT Really

Simply no body of evidence to support the claims that SRI, ethical or ESG funds outperform

Back to the old challenge: Manager Selection

Does doing good do well for investors?

Do RI funds outperform?

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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Australian Ethical Smaller Companies Trust

Comparison with the Mercer Retail­Equity ­ Australia ­ Small Cap Universe Annualised Risk and Return for 3 years ended January 2010 (after tax and after fees) ­ ­ ­ ­ Median 2.0 ­1.0 ­4.0 Annual Return (% pa) ­7.0 ­10.0 ­13.0 ­16.0 ­19.0 18.0 21.0 24.0 27.0 30.0 33.0 Annualised Standard Deviation (% pa) calculated monthly AUG0002AU Data Source: Lipper, A Thomson Reuters Company
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Investment Philosophy & Process

Philosophy overview

  • Dual focus on Ethical and Financial outcomes
  • 21 years of competitive ESG investing
  • Our Charter directs us to:

– seek investments which improve the world (+ve screen) – avoid investments which are likely to have a negative impact on society and the environment (­ve screen) – engage with companies to change corporate practice (engagement)

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Idea generation Investible universe Fundamental analysis Portfolio construction Holdings and targets Compliance and monitoring ESG and financial filters

Investment Philosophy & Process

Investment process – value style applied to growth bias

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WIIFY?

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Opportunities for Advisers

SRI and fund flow

Is there a difference between how SRI investors respond to past performance?

  • Why would there be?
– SRI investors derive utility from the SRI attribute – Difficult to find alternative funds
  • The research supports these conjectures
  • Bollen (2006) finds SRI funds receive more inflow after good performance and

lose less outflow after bad than conventional funds

  • Benson and Humphrey (2008) find
– Flow to SRI funds is less sensitive to past one month and one year performance than flow to conventional funds. – However, do not find SRI investors have different sensitivities to best and worst performers – SRI investors invest more in funds already held

Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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Is there a demand from Australians?

Does anybody really care?

  • Green Voters – national average 10%. Your region?
  • Recent surveys conducted in Australia indicate strong demand for SRI

investment options.

  • A survey of 1000 investors conducted by Resnik and KPMG in 2000 found

that 76% would like to know where their superannuation is currently invested, and 69% would consider an SRI option if it was made available to them.

  • A separate study conducted by Monash University in 2000 found that 87%

would consider an SRI option.

  • Additionally, a survey conducted by the Australian Institute of

Superannuation Trustees in early 2001 found that 73% of trustees believe that SRI is a legitimate investment class.

  • Importantly, the Monash study found that 92% of investors felt that financial

performance should not be the only criterion for selecting investments.

  • Both surveys found that most investors would be willing to accept slightly

reduced returns for SRI investments. Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University

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Life is more interesting

Green properties

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Life is more interesting

International Equities – smart energy

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TOMRA Vestas Shimano Geodynamics Origin

Opportunities for Advisers

Quality client dialogue

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Adviser training?

RIAA website – online course

AN ONLINE RESPONSIBLE INVESTMENT CERTIFICATION COURSE DESIGNED SPECIFICALLY FOR ADVISERS TO:

  • Improve your client retention
  • Help exceed client expectations
  • Engender trust and obtain a larger share of their business

Launched in 2006 by RIAA in partnership with SAI Global,, the course provides financial advisers with skills and competencies to further educate investors and in turn provide professional advice on responsible investments. The course, which takes around 3 to 4 hours to complete, provides you with a step­by­step interview process which will help to:

– build the client’s responsible investment profile, – examines the range of products and services available, – explains how stocks are selected for inclusion in responsible investment funds, – helps with portfolio construction, – gives case studies and data – provides the latest global research on performance and indexes.
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Useful Sources Reference

  • www.austethical.com.au
  • www.responsibleinvestment.org.au
  • www.caer.org.au
  • http://www.unpri.org/
  • http://www.unepfi.org/
  • http://www.unepfi.org/publications/investment/index.h

tml Look for PDF – Demystifying Responsible Investment

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Conclusion

Does doing good do well?

–Yes, Really!

– At least no different to conventional funds on financial grounds – Extra utility in client’s eyes – Therefore retention and client satisfaction