Investment that considers sustainability isn’t about changing the world; it’s about understanding how the world is changing.
Why Australian not-for-profits are embracing sustainable investing
The global sustainable investment market has grown 61%, from US $13.3 trillion in 2012 to US $21.4 trillion at the start of 2014[i]. Australian not-for-profit (NFP) investors are part of this global move towards more responsible or sustainable investing.
One of the biggest reasons for this heightened focus on sustainable investing is the potential to align an organisation’s investment program with the broader culture, ethics and beliefs of the organisation – and protect or enhance the organisation’s reputation amid increasing media and public attention to sustainability issues such as climate change, labour standards and corruption.
Another major driver is the increasing academic and industry evidence that environmental, social and governance (ESG) factors can materially impact investment risk and returns.
As long-term investors and fiduciaries looking to serve the community over the long-term, it’s wise investing to consider this broader set of risks and opportunities.
So how do you start on the journey to sustainable investing?
Divestment vs. active ownership
In the past, simply excluding investments in sectors inconsistent with an organisation’s ethics - historically areas such as tobacco, weapons and gambling, was the primary way investors implemented a sustainable investment strategy. This approach continues to be a common model for many investors concerned about specific ethical issues.
However, the downside of divestment or exclusion approaches is two-fold: first, investors may see lower returns from excluding profitable businesses from their portfolios for ethical reasons (a trade-off that may be acceptable to many NFP investors); and second, these investments will typically be purchased by other investors who are perhaps less concerned about sustainability or ethical issues.
At Mercer, we often advise our clients to consider using their influence through engagement to motivate their investment managers and the management and boards of companies in their portfolios towards more sustainable practices, rather than simply “fleeing the scene”.
The University of Sydney recently asked its listed equity fund managers to work with them to reduce its carbon footprint by 20 per cent over three years. It also joined the Carbon Disclosure Project through which it will partner with other global investors to encourage companies to measure and reduce their carbon emissions. The decision followed a comprehensive review that considered a number of options, including whether to divest. Commenting on the strategy the University adopted, Vice-Principal (Operations) Sara Watts said, “(It will) give the University a legitimate voice in the conversation on how organisations can best address climate change risks.”
If you simply choose to divest from fossil fuels in response to concerns about climate change, you give up your seat at the table to encourage companies, and the investment market more widely, to focus on reducing emissions. One can also be open to criticism if divesting a sector has other indirect implications, such as on employment in the sector, or where the activity is significant in improving living standards in emerging countries. Engagement can be a more productive way to achieve the desired sustainability outcomes in the long term. While engagement won’t be the answer to every sustainable investment issue, it is worth considering as an alternative to divestment.
Preparing for change
A good first step is an education and beliefs workshop for your board or investment committee. It’s important to understand these drivers more fully and to determine what is pushing your organisation to consider sustainable investing – and what approaches work best for you, given the size and complexity of your investments. Also, at Mercer we work with clients to clearly articulate their ESG Beliefs and incorporate them into their investment policy, process and portfolios.
Sustainable investment is on the rise. As a well-informed adopter you can use it as a vehicle to deliver sustainable investment returns over the long-term, while protecting your organisation’s reputation and aligning your investments with your overall mission.
[i] ‘The Global Sustainable Investment Review 2014’, Global Sustainable Investment Alliance (GSIA)
About the Author
Alexis is a Principal in Mercer’s Investments business within the Responsible Investment (RI) team, based in Sydney. Alexis has more than 10 years’ experience in sustainable investing and she works with clients to develop and implement a set of RI beliefs, policies, and practices throughout the investment process. This includes integrating environmental, social, and governance (ESG) factors into the investment process and making use of ownership rights through proxy voting and engagement.
Prior to joining Mercer in April 2014, Alexis spent 10 years in the governance and sustainable investment team at F&C Asset Management in London and Boston.
Alexis holds an MS (politics of the world economy) from the London School of Economics and Political Science, and a Bachelor of Arts (political science and religion) from Barnard College, Columbia University, US. She is a member of the Governance Institute of Australia.