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Investors have been mobilised by lacklustre political progress on climate change and now expect fund managers and company directors to act.

As eyes around the world were turning to Scotland for the 2021 United Nations Climate Change Conference (COP26), research house Morningstar revealed the extent of demand for financial products with an environmental focus.

At September 30, “sustainable funds” around the world had a total of $US3.9 trillion ($5.3 trillion) in assets under management. In Australia, these green investment products are now worth a collective $38 billion, up 11 per cent over the September quarter.

Superannuation and investment manager Australian Ethical accounts for 18 per cent of that pool of sustainably managed assets. It says it has seen rising demand for its funds in the lead-up to and during COP26, as climate change was thrust back onto the news agenda with the imminent summit and easing of coronavirus restrictions.

Nathan Fradley, of Lime Financial Planning, a certified ethical investment adviser, says the response to COP26 from clients and investors is not just a heightened interest in environmental, social and governance (ESG) issues but “frustration” at the lack of progress from governments.

“Investors feel it is another let-down that does not do enough,” Fradley says. “What is refreshing, though, is that the frustration is visible and widespread. I feel this will put further pressure on business to lead the way, with a larger focus on carbon emissions by super funds, and climate change risk as a thematic for investment.”

A deal between the world’s nations proved elusive in the conference’s first week after big emitters China, India and Russia led efforts to oppose a hard deadline of 2050 for net zero.

The heightened focus on climate change – having been largely absent from mainstream news headlines during the pandemic – is expected to drive even further demand for ESG investments.

“COP26 will absolutely affect Australian investors because it will further enhance their confidence over the legitimacy of pursuing ESG investments and supports their existing beliefs that the whole investment community has an active role to play in its success,” says Louise Watson, head of Australia and New Zealand at global investment manager Natixis.

“In this way ESG investing sets itself apart as a truly unique investment model, where the investment community works together for a desired outcome, making it particularly attractive to Australian investor.”

A survey of global investors by Natixis in April, in which 400 Australians with at least $100,000 in investible assets took part, suggested 21 per cent already invest in ESG products. A further 41 per cent said they did not invest in ESG yet but were interested in doing so.

Of those that are already investing with an ESG lens, 41.7 per cent said such an approach allowed them to align their investments with their personal values, while 38.1 per cent said they did so in order to “support the environment”.

More than one-third (34.5 per cent) responded that they believed ESG funds had similar or better performance than other non-ESG investment products. Half agreed with the proposition that they have a “responsibility to help fix societal issues through my investments”.

“It’s clear that ESG has finally moved into mainstream investment management because it is no longer possible to ignore the science of climate change, nor deny the conclusion that we are at a tipping point in terms of the global environment,” says Pierre Lenders, head of ESG at Capital Fund Management in Paris.

Ethical engagement

But while more and more investors are allocating all or some of their portfolio to ESG investment products, they also increasingly expect more from their fund managers than just screening out fossil fuel companies and pocketing a performance fee.

The Natixis survey found the vast majority of Australian respondents (69.5 per cent) believed fund managers should be “actively engaging with companies they invest in”.

The same number said they expected fund managers to look at “more than just the financial aspects of a company”, while 67 per cent said they expected fund managers to vote on all the shares they own.

Globally, 60 per cent of the 8550 investors surveyed rejected the idea that companies were responsible only for creating shareholder value – once a widely held and uncontroversial principle of free market enterprise.

Indeed, 82 per cent of the global respondents said companies had a responsibility to address social issues – a larger cohort that the 78 per cent who said governments had such an obligation.

The findings represent a recent cultural shift whereby investors are no longer satisfied to simply deploy capital to niche investment products to satisfy their personal moral obligations.

Instead, they demand that all companies improve their ESG standing and commit to reducing carbon emissions or other environmental and social goals. And, crucially for the financial services industry, they expect the professionals managing their money to play a role in ensuring that actually happens.

In other words, they expect investment managers to effectively become environmental activists.

Fradley agrees this is an increasing expectation of his financial planning clients and says this has only heightened since COP26. “A big issue right now is genuine engagement and voting,” he says.

“Divestment-only approaches mean companies may dump assets to private equity firms, which can be mismanaged and result in worse outcomes.”

For investors who genuinely want to make a difference to climate change, therefore, just selling stock or buying into a fund that avoids certain sectors isn’t enough because a new owner may not apply an ESG lens, allowing a high-polluting company to continue its practices.

Stewards and signatures

Fradley points to $100 billion-plus mega-funds AustralianSuper and Aware Super as examples of investment managers with good track records on ESG engagement.

The former has a 73 per cent voting record on ESG metrics and the latter releases a stewardship report to members demonstrating the questions on emissions reduction and gender and racial diversity it is asking companies, he says.

Australian Ethical chief executive John McMurdo is another super fund trustee who agrees divestment is not enough.

“While record amounts of money are pouring into ‘sustainable’ and ESG funds, capital continues to flow into companies that are harming people, planet and animals,” he says.

“Ethical investing considers the impact of these investments and avoids investments in non-aligned industries, as well as actively engaging with companies to influence the shifts necessary to avoid the worst of climate change.”

And, many companies have themselves committed to decarbonisation or other ESG outcomes. Alongside the politicians and diplomats at COP26 in Glasgow was a star-studded line-up of listed company executives, including mining sector bosses such as Santos chief executive Kevin Gallagher and iron ore magnate Andrew Forrest, Australia’s richest man.

Doug McNamee, chief executive and founder of Jolt, an electric vehicle charging network, says: “COP26 has been a catalyst for the business community in recognising the significant growth opportunities to be realised by investing in zero emissions technologies.”

To help give them a nudge, AustralianEthical took out a wrap-around ad on the cover of the Financial Times newspaper urging powerful governments and companies to act on climate change.

It featured 7500 signatures of regular investors adding their names to the cause, as well as celebrity advocates such as Atlassian billionaire Mike Cannon-Brookes and Hollywood superstar Russell Crowe.

Perhaps India or China will be next.

Read the full story: $5 trillion powering the green investment market – The Australian Financial Review. 

Download the PDF here.  

If you’d like to discuss your strategic communication call us or contact us here.  

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