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 investment capabilities of 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. 2
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? 3
Business and Products Parentage • Australian Ethical (AEF) listed on ASX October 2002 • Australian Ethical Super – Australian subsidiary of Australian Ethical Ethical Investment Ltd Investment • CAER – formerly part of Australian Ethical, now an independent stand alone non profit. Retains a close Centre for partnership with Australian Australian Aust. Ethical Ethical, including sharing office Ethical Research Super space (CAER) 4
Business overview Doing good has been a good business model • Debt free • Profitable • High retention rates • Specialised boutique • Outstanding performance 5
Business Product Overview 6
The World of Responsible Investment Ethical/SR Investment a broad church 7
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 8
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 other 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 9
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 10
Drivers of RI Global growth 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 – 11 Queensland University
Drivers of RI United Nations Principles for Responsible Investment (PRI). 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 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 12
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. 13
Australian First Advocacy Fund 14
CLIMATE ADVOCACY FUND (CAF) What? A fund whose mission is to match or slightly better index returns and pursue improved ESG performance Why? “To benefit investors, society and the environment” How? • Passive portfolio construction using “economic footprint” weighting • Explicit legal obligation on RE to pursue “ESG charter” aims Who? Retail and institutional investors who want an index like return and want to have their voice heard/pursue the UNPRI principles. 15
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 16
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.” 17
So, is “doing good” a good thing for investors? 18
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 outperform? 19
Does doing good do well for investors? Do conventional funds outperform? NOT Really Simply no body of evidence to support the claims that conventional funds outperform net of fees Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University 20
Does doing good do well for investors? The main –ve argument? One view screening stocks restricts the investor’s universe and results in less diversification benefits and investment opportunities, thereby resulting in a new “less efficient” investment frontier. Return Therefore: ESG harms performance Markowitz Frontier Moskowitz ESG / SRI constrained Frontier Risk NB: This is an issue for ALL ‘screened’ portfolios (i.e. growth/value, large/small, domestic/ international, high/low PE, PB, div yield etc). Source: Dr. Darren Lee and Dr Jacquelyn Humphrey – Queensland University 21
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