Investing for innovation

The word ‘innovation’ is far more than a buzz word. It’s about creating better, more efficient ways to do business – and meeting the rapidly changing needs of our global community, says our Chief Investment Officer, David Macri.

As an ethical investment manager, we believe investing should be about more than getting good financial returns. It should also provide positive benefits that shape a better, more sustainable future for our planet.

Our investment philosophy has been governed by our Ethical Charter since our inception in 1986 and remains unchanged but still relevant in today’s world. The Charter is a series of statements that guide both the positive side (investments we seek out) and the negative side (investments we avoid) of our ethical approach. One of the positive tenets explicitly directs us to seek out investments which provide for and support the development of appropriate technological systems. As such, we have had a focus on technology and innovation at Australian Ethical for a long time. However innovation isn’t just limited to the development of technology, it may include investing in the kinds of companies that provide better care for vulnerable people, use resources more efficiently, or provide alternatives to fossil fuels.

We’re also finding innovation coming from unexpected areas such as financial instruments which are encouraging companies to create more diverse workforces and leadership teams, the benefits of which are not limited to societal improvements and the broader economy, but also to shareholders given that the research indicates that companies with diverse teams tend to perform better.

Investing in the new economy

Business has a major role to play in finding solutions to the big issues, including climate change, automation and our rapidly ageing population. That’s why Australian Ethical favours sectors such as renewable energy, technology, healthcare and biotechnology. It is these innovative sectors that will be driving the Australian, and indeed the global, economy forward.

We’re also keen to support new companies and ideas in their infancy that could help provide solutions to pressing issues such as climate change. We’ve recently invested in two venture capital funds: Right Click Capital Growth Fund, an Australian fund that invests in early stage technology companies, and the Artesian Clean Energy Seed Fund, which focuses on very early stage clean energy technologies.

An Australian company with access to a wide global network of venture capital investors, Right Click Capital looks to invest in technology companies whose ideas have market potential, and whose management team can execute on their strategy. We believe that innovations such as automation, artificial intelligence, and data capture can help create an efficient and safer future for society.

The Artesian Clean Energy Seed Fund works by partnering with incubators – hubs of up-and-coming entrepreneurs – angel groups and universities, to identify and provide seed funding to clean energy start-ups, helping them turn their ideas into businesses. Through investing with Artesian, we hope to develop clean energy technology which will contribute to breaking the globe’s reliance on fossil fuels.

Both Funds invest in early stage companies. This means they tend to be higher risk investments than established businesses – but they also have the potential to offer much higher returns. For these reasons, our investments form a small part of our Balanced managed fund, and the Balanced and Growth options of our super fund, adding to portfolio diversification and higher returns potential.

What’s more, by investing with companies in early stages of development, we hope to have more opportunity to positively influence their boards. For instance, we can help them monitor the environmental impact of their activities, and provide advice on how they can create a supportive and diverse workplace for their employees.

Supporting diversity leads to more innovation

Generally, issues such as diversity aren’t front of mind among boards, where the chief focus is likely to be on growth. But supporting diversity in workplaces isn’t only
the right thing to do – it’s also good for business.

Research from not-for-profit group Catalyst found that businesses with more women in the workplace perform better financially. And a report by global consulting firm McKinsey & Co. showed that teams with greater diversity are better at understanding their customers’ needs and coming up with innovative solutions.

As an investment company, Australian Ethical is in a great position to encourage companies to think about diversity. For example, we advocate that women should make up at least 30% of their board – a figure that’s in line with the target proposed by the Australian Institute of Company Directors. It’s believed that 30% is the critical mass needed to ensure that women’s voices are encouraged and heard. We also walk the talk, with our gender-diverse group of experienced board members.

We continue to engage with companies (both those that we do invest in, and even those that we don’t) at their executive and board level to push for greater gender diversity. And where necessary, we will continue to exercise our voting rights at AGMs, if directors are not doing their best to promote gender diversity in their leadership and at board level.

In March 2017, women made up 25% of ASX 200 board positions – a significant jump from 8.3% in 2009. Ultimately, we would like to see it approach 50% and to encourage smaller companies to follow suit.

Some investment tools are more innovative than others

Influencing boards isn’t the only way we can promote diversity. We can also help make sure that funds are channelled toward companies that actively promote diversity. For example, NAB has recently introduced a fixed income instrument, the NAB Social Bond (Gender Equality) that provides finance to companies with the best outcomes for gender equality.

The NAB Social Bond falls into an innovative type of fixed-interest investment. Another innovation in the fixed interest market has been the development of ‘green bonds’. Like other bonds, they work by providing loans to companies which pay interest over time to the lender. The difference with green bonds is that the proceeds used solely to fund projects or companies that have a positive impact on the environment. For example, they could fund a renewable energy project, or improve the energy efficiency of existing buildings.

In the last two years, demand for green bonds has been exceptionally strong. Thanks to their high demand, they’ve performed well relative to other similar credit-rated instruments. Currently, our Fixed Interest and Balanced Funds include green bonds, as do the Conservative, Balanced and Growth options of our super fund.

Investing for the future – today

The global community is already feeling the effects of game-changing issues such as climate change and automation. Finding innovative ways to deal with these issues is pressing. Our promise to our members is that we will continue to invest in companies and ideas that provide solutions for a better world – and avoid those that don’t.

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