A sustainable future

More than a decade after individual investors and religious groups coined the phrase, sustainable responsible investment (SRI) is becoming increasingly popular with mainstream investors wanting to cash in on its success.

SRI is defined as the placement of money in managed funds, share portfolios, or other investment securities portfolios screened to reflect environmental, social, labour relations or other ethical considerations. And the range of investment options in this area is becoming more diverse.

“What has emerged has certainly been a strong business case for sustainability. It [an SRI company] is not vastly different from other companies in its activities — it comes across risks and opportunities, but the sustainable link manages the impact (of these), making it a better managed company and a better investment,” said the executive director of the EthicalInvestment Association (EIA), Louise O’Halloran.

Results from the SRI Benchmarking Study, commissioned by the association, prove that sustainable responsible investing is growing strongly in Australia.

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SRI managed portfolios grew by 70 per cent during the 2005 financial year from $4.5 billion (revised upwards from $3.31 billion in last year’s study) to $7.67 billion, an increase of $3.17 billion.

The study also identified over 100 financial advisers with a specific interest in SRI investing, up from 54 in the 2004 study.

Of that group, 30 advisers indicated they advise on direct investment portfolios, which total $482 million, up 65 per cent from $292 million in 2004.

And new investor inflows into existing SRI funds form a small but significant part of this growth.

According to O’Halloran, this kind of growth is likely to continue.

“Sustainable finance has kept its audience and its audience has grown. It may grow to a point where it becomes the dominant investment style … because it has so much going for it,” O’Halloran said.

This week the EIA will host the SRI international conference in Sydney.

It is just one initiative that O’Halloran said demonstrates the growing interest in this area.

“Those who take SRI seriously now include the leaders of nations, executives of the world’s largest banks, investment houses, superannuation funds and corporations, and powerful figures from the civic, religious and charitable worlds,” OHalloran said.

Earlier this month, the EIA also launched the world’s first online SRI training course for financial advisers.

The association was also responsible for developing the SRI Symbol, the world’s first SRI certification designed to assist consumers to find the SRI product or service that best suits their values and beliefs.

In 2003, the Australian Securities and Investments Commission released guidelines for socially responsible investing. Although it is not a requirement for anyone to follow the guidelines, if the guidelines are factored into the development of a product, they have to be disclosed.

With an increasing amount of SRI information available, listed companies and financial advisers are beginning to recognise the potential of SRI.

Investa Property Group (Investa), a listed property trust that manages a portfolio of commercial and office properties, was recently ranked number one in the world on the Dow Jones Sustainability Index for financial services.

“Property is new in focusing on sustainability. Our tenants are increasingly concerned by these things, so it is a real commercial point,” said Investa group executive, external funds, Bill Grounds.

Grounds said Investa’s commitment to sustainability has driven investment in the business, as well as encouraged tenants to take on longer property leases.

“More and more investors know there are obligations to start thinking about [sustainability]. The Queensland Government won’t lease buildings from us unless they have a certain [sustainability] rating. The correlation between sustainability and real returns is there,” Grounds said.

Francis Grey is the research manager, Australia and New Zealand, at Sustainable Asset Management, a company that manages investment funds with a focus on sustainability.

Grey said global warming has been a major driver of change in attitude towards SRI.

“Investors are going to be held more accountable for the way a company is working. The more astute companies are already asking investors [their opinion],” Grey said.

He anticipates that SRI will become more popular with investors as the market becomes better educated about its benefits.

Grey also said as more and more companies begin to operate responsibly, other companies would be forced to do the same.

“[Corporate socially responsible companies] are more profitable for share holders and more likely to be there in the long-term as [society] becomes less and less tolerant of destroying public commons,” Grey said.

According to Grey, as Australians’ social conscience grows, SRI will become the primary choice for investors.

“I think it all bodes very well for SRI. It will be a necessary part of everyone’s portfolio eventually,” Grey said.

But he admits SRI, which is a more long-term investment option, will face challenges.

“Every investment fund and fund manager creates negative externalities out there. The biggest negative externality effect in the investment market is the focus on the short-term,” Grey said.

He said in the future, fund managers would need to ask themselves the question ‘are we making this money out of things that make life harder?’

O’Halloran agrees that the market’s obsession with delivering big returns in the short-term is a significant obstacle to changing attitudes towards SRI.

“[SRI] struggles with the short-term thinking of the market. We almost require a whole new generation of investors [to change the mindset],” O’Halloran said.

But O’Halloran is optimistic that in time the mindset of the market will change.

“If you allowed a company one wish it would be the ability to express their long-term goals and be judged on that and not judged by what the company plans to do next week,” O’Halloran said.