We used to be in the minority, but ethical investing is hitting the mainstream. As responsible investing grows, we take a look at the trends shaping this growth and how it performs against the market. Spoiler alert: it’s good.
In 2017 responsible and ethical investing hit an all-time high, quadrupling since 2014. Nine in ten Australians now expect their super and other investments to be invested ethically and responsibly. We can’t say we’re surprised, after all, we have been spruiking the virtues of ethical investing for over 30 years and globally, conscious consumption has been on the rise in recent years. We are pleased to see more people actively aware of how their investments impact the world around them and making the shift.
The rise of conscious consumers
According to research released by Responsible Investment Association Australia(RIAA) four out of five Australians would consider switching their super or other investments if their fund engaged in activities that did not align with their values.
More than half of the Australian-wide survey said they would consider making ethical or responsible investments in the next one to five years, while millennials (the generation born between 1980 and 1995) were the most likely group of investors to consider investing in ethical companies, funds or super (69%).
“The vast majority of Australians want superannuation invested responsibly, such as through investing in companies that build clean energy infrastructure or avoiding investments that can harm communities such as weapons manufacturing,” RIAA’s CEO Simon O’Connor says. “Other key issues of concern for consumers, in terms of their investments, include animal cruelty (69%), human rights violations (62%) and pornography (56%).
This rise in social consciousness has seen core responsible investment assets under management in Australia hit $64.9 billion in 2016, a 26% jump from the previous year.
“Consumer sentiment mirrors the continuing growth in the sector with responsible investment more than quadrupling over the past three years and nearly half of Australia’s assets under management now being invested through responsible investments,” O’Connor continues.
It’s important to note that while responsible investing is growing, some funds are more ‘ethically passive’ (e.g. only screening out investments in tobacco) while other funds have a more rigorous screening process and are transparent about what they do and don’t invest in, and why. A truly ethical fund will have a rigorous process for achieving positive social and environmental outcomes, as well as financial outcomes.
Australian Ethical’s head of ethics research, Stuart Palmer, says the rise of responsible investing is being driven by the conviction that the world’s greatest challenges – climate change, conservation and human rights –require more than just a ‘business as usual’ approach. There is a growing realisation by investors that money can be used as a force of good to solve these problems.
“There are significant ethical challenges facing us globally and locally,” explains Stuart Palmer. “Things like climate change and the treatment of workers in business supply chains. There’s a sense that governments aren’t taking the action they need to and we need others to get involved, like private business. So people are seeing that where they invest their super and other funds can have an impact to make the world a better place.
“People are becoming more aware that there are ethical options out there. And that’s an extension of ethical consumption generally. Just as we’ve had a rise in fair trade coffee and free-range eggs, people increasingly understand that the choices they make with their money can make an impact. They want to know their investments will have a positive impact and they are avoiding negative harm to the things important to them.”
The Millennial effect
Millennials are leading the charge when it comes to responsible investing, with 75% likelyto invest in a super fund that considers environmental, social and governance issues (ESG). By 2030 Millennials will make up two-thirds of the workforce in Australia representing the largest source of income and consumer spending.
Millennials prefer to do business with corporations and brands with sustainable manufacturing, ethical business standards and prosocial messages and believe that their investment is an extension of their values. According to Deloitte research, 87% of Millennials want business to measure more than just financial performance, such as their impact on the wider society and behave in an ethical manner.
Ethical funds are enjoying strong returns
“As more Australians show a desire for their investments and savings to align with their values, those already investing their money responsibly enjoy strong financial performance,” says O’Connor.
Over the last 10 years, the average responsibly invested share fund returned 6.3% a year, compared with 3.8% annual return for the average large-cap Australian Share fund, debunking the myth that you have to compromise on returns to invest ethically.
“Australian Ethical has been around for over 30 years, and it’s great to see the rest of the industry is finally catching up,” says our managing director Phil Vernon. “This is the future of super as more people become socially responsible and aware of where their money is being invested.
“What is great to see is that people are now expecting their investments to support the emergence of tomorrow’s industries,” Vernon continues. “People are no longer complacent about where their money is invested. They want it out of companies that are doing damage to the planet or harming society and invested in assets and infrastructure that will benefit the world and Australia long-term.
At Australian Ethical, we have a positive impact beyond our investments. Through our advocacy we encourage companies to be more responsible, for example, encouraging them to divest from fossil fuels or reduce their emissions. And we are able to influence government policy around environmental concerns like climate targets and human rights issues such as modern-day slavery in Australia.