Financial advisers play a key role in ensuring investors get the message on socially responsible investing but changing mindsets has been slower than expected.
An industry roundtable event last week revealed the frustration that many campaigners for environmental, social and governance (ESG) policy feel at SRI remaining a fringe, altruistic issue rather than a driver of investment decisions.
Speaking at the event, the leaders of Premium Wealth Management, Dalton Nicol Reid, The Emerald Club and the Asset Owners Disclosure Project (AODP), agreed that a focus on corporate responsibility is of little value if it is at the expense of returns.
The group also pointed to evidence that companies which recognise the importance of good environmental, social and governance (ESG) policy can in fact enhance returns to their investors.
Circular logic
CEO of Premium Wealth Management, Paul Harding-Davis, said there is a common perception that there is no demand for responsible investments, but this was simply a matter of investors rarely being asked if they want some of their investments managed this way.
“I often hear in the adviser community that there is no demand for ESG investments, but this is a matter of advisers thinking about product rather than about solutions. How many clients have asked for a small cap portfolio?” he asks.
“I believe most clients don’t know they can ask for it, which really creates circular logic. Only three or four percent of clients will ask for a 100 per cent ESG portfolio; but it is our view that 60-70 percent would like some exposure once they understand they don’t have to give up returns.”
Harley Dalton, CEO of Dalton Nicol Reid said there remains a lingering perception that performance is sacrificed when choosing ESG investments, but that this focus could in fact enhance returns.
“It is not enough that an investment is sustainable, first and foremost, it needs to perform,” he said.
“The track record of our Australian equities portfolio demonstrates that you do not need to sacrifice performance if investing this way. In fact, it is our view that a focus on good governance and social responsibility reduces risk and enhances returns,” he said.
“Including ESG in our screening of companies allows us to screen out companies with poor governance, large environmental and social risks, as we believe this can impact their earnings over time.”
Dr John Hewson, Chairman of the Asset Owners Disclosure Project and Shartru Capital, believes the entire investment industry would benefit if advisers and investment managers educate their clients that they don’t need to sacrifice performance.
“The risk of climate change is very real. However, most governments underprice this risk, just as they did with subprime market risk,” he said.
“Additionally, the issue of climate change has never been raised at board level in some of Australia’s largest investment houses. And only a very small percentage of insurance boards have addressed the issue adequately.
Under pressure
Managing director of the Emerald Club, Justin Medcalf, said it was “commonplace” for advisers to tell clients that SRI underperform as though presenting a fact.
“Our business focuses on the 20 per cent of Australians who use a financial adviser,” he said.
“Unfortunately, most advisers are not comfortable talking about climate change. It is frightening for many and there remains a very high level of scepticism.
“However there is a rumbling under the surface and there I believe there will be a serious mind shift. It is good to see this pressure building.”
