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INVESTMENTS

Investment perspective

How the market is responding to the unfolding situation in Ukraine. Why we think electric vehicles and renewable energy may help create a more stable world.  


18 March 2022   |   6 min read



Australian Ethical has no investment in Russia or Russian organisations (or in Ukraine) and no investment in companies that manufacture weapons or produce fossil fuels1.
 

Instead, our portfolio is aligned with positive future-building industries like renewables which are helping to create greater energy independence for countries and ultimately a more stable geopolitical and investment landscape for all. 


How the markets responded

Global markets fell in response to the news of Russia's invasion in late February, and then in the following days many developed markets (including the US and Australia) started to retrace their losses with market rallies.

History tells us that geopolitical events such as wars, though devastating to the impacted populations, tend not to be major drivers of market behaviour over extended periods of time. Looking at conflicts that have occurred in the last 50 years, and even with the impact of a prolonged, global conflict such as WWII, markets ended higher than when the war commenced.2

Our overarching message for investors is to stay focused on their long-term goals. History has shown that investors can benefit from staying invested over time in a portfolio that is diversified across a range of shares and other asset classes. Both time in the market and diversity of assets are more likely to provide investors with more consistent returns that are less impacted by specific factors or events.


Markets focus on fundamental drivers 

In fact, even in times of geopolitical turmoil, markets will come back to focus on fundamental drivers – such as inflation, interest rates and economic growth. Each of these drivers has a myriad of influences. Global conflicts can of course have an effect. In the current crisis there are legitimate concerns around the inflationary impact of Russian exports, particularly oil and gas. The Brent Crude oil price has continued to sit above US$100/bbl following the invasion and higher oil prices naturally flow on to the costs of energy, transport and the production of goods.

From our point of view, higher oil and gas prices serve to further highlight the investment opportunity represented by electric vehicles, renewable energy generation and storage. By actively supporting the shift to renewables, we believe this inflation driver can be mitigated over time, supporting better investment outcomes for all.


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Ethical investing goes well beyond ESG

Though it’s great to hear than many super funds and fund managers are divesting from their Russian oil and gas assets, the real question is why they were invested in the first place? By contrast, before investing, ethical funds like ours consider in detail the broader values alignment and overall positive impact on the world of sectors, companies, and the jurisdictions they operate within. This is the profound difference between our approach and standard ESG approaches. Many portfolios labelled as ‘ESG’, have exposure to assets like Russian oil and gas because they’re only considering the potential financial implications of ‘E, S and G’ risk factors, and as we have seen, waiting for these risks to play out can often be too late. Indeed, Bloomberg analysis estimates that fund managers boasting ‘environmental, social and governance standards’ held at least USD8.3 billion in Russian assets right before Putin launched his invasion of Ukraine. Of this, it’s likely a large proportion were invested in the equities and debt of Russian fossil fuel companies or in Russian sovereign debt. After only two weeks of war, the value of these assets was being reported by asset managers to be “at or near zero.“

John Woods, Australian Ethical’s Head of Asset Allocation explains, “Over the last six months as the world emerged from COVID we saw energy prices on the rise. One way to gain exposure to this growth has been to invest in energy companies on the Russian exchange. The inherent ESG risks have meant these investments were relatively ‘cheap’. However, these risks have well and truly come home to roost."

“It remains our conviction that by directing investment dollars towards renewable energy, we will help to create a more liveable world for all people.”

– JOHN WOODS, HEAD OF ASSET ALLOCATION RESEARCH AT AE

 

1 We don’t invest in companies whose main business is fossil fuels or gambling, or in diversified companies that earn some fossil fuel or gambling revenue and aren't creating positive impact with their other activities. We may invest in a diversified company which is having a positive impact in other ways such as producing renewable energy, providing its negative revenue is sufficiently low (a maximum of 5% to 33% depending on the activity). We have never invested in tobacco and support Tobacco Free Portfolios. Click here for more information on our Ethical Criteria.

2 The US Stock Market cumulatively returned 37% (as calculated by S&P 500 Index (Accumulation). Source: Bloomberg. The Australian Stock Market cumulatively returned 16% (as calculated by the All Ordinaries Index). Source: Bloomberg.



If you would like to know more about our range of funds, or even how to get started with responsible investing, please get in touch with a member of our Business Development Manager team.

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