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Simon O’Connor on sustainable returns and what it means to be a responsible investor

Written and accurate as at: Sep 15, 2022 Current Stats & Facts

With a growing demand for ethical and responsible investment options in Australia, we chat to Simon O’Connor, CEO of the Responsible Investment Association Australasia (RIAA) about his views on what it means to invest responsibly, and some of the insights from their annual benchmarking report.

Q. Simon, what makes an investment responsible, and how, if at all, does responsible investing differ from ethical investing or ESG investing?

Responsible investment, also known as sustainable or ethical investment, is a broad-based approach to investing that factors in people, society and the environment, along with financial performance, when making and managing investments.

There are a range of approaches to responsible investing, and investors may use a combination of approaches when managing their portfolios. In line with the Global Sustainable Investment Alliance’s definitions, RIAA arranges these on a spectrum in ascending order in terms of real-world outcomes.

ESG integration is just one approach, focused largely on identifying risks and opportunities and including these alongside traditional financial analysis. ESG integration is now widely seen as a baseline of prudent investment management, and it’s increasingly expected that responsible investors are also positive stewards of capital, incorporating corporate engagement or impact investing into their investment strategy.

Q. It would appear that the demand for ethical and responsible investment options continues to be on the rise in Australia. What do you think is the driving force behind this demand?

There’s a perfect collision of forces at the moment, meaning demand for responsible investments is at its highest ever.

Firstly, and after many years of circling myths, there’s an acknowledgement that responsible investments on average provide competitive returns over the medium to long term.

Secondly, consumers are simply expecting that their investments are responsible nowadays—our study from earlier this year showed more than four in five Australians expect their investments to be made ethically or responsibly. Compounding crises over recent years like COVID, the destruction of Indigenous cultural heritage sites, and extreme weather events have fuelled awareness of responsible investing and people’s desire for their investments and savings to have a positive impact.

And finally, the stick rather than the carrot is being deployed as governments and regulators across the globe move to require certain responsible investment practices by investment managers and companies—such as enhanced disclosures, consideration of climate risk, and reporting on risks of modern slavery in supply chains.

Q. One of the most common questions people have when considering ethical and responsible investment options can often be whether they will be sacrificing returns. Do you have any thoughts you would like to share on this?

There’s a growing body of evidence that shows super funds and investment funds that take an ethical and responsible approach are on average, performing better than their peers. For example, our 2021 Benchmarking Report* shows responsibly invested international share funds outperformed their mainstream peers over one, three, and five year timeframes, and responsible investment multi-sector growth funds (which invest in a combination of asset classes including shares and property) outperformed across all timeframes.

On this point, study after study shows that companies that look after their employees, minimise their impact on the environment, have good governance, and protect human rights across supply chains, are more likely to deliver superior financial returns to investors.

Q. Market volatility can often be top of mind for many investors, and this may be especially the case for some of them at present. What are your thoughts on the potential for market volatility in terms of ethical and responsible investment options when compared to other investments?

Volatile markets are a reality of investing, and it’s right that markets have been particularly volatile in recent months and years. Sustainability, by its very definition, involves thinking long term. And if there’s one investment you want to perform well in the long term, it’s an investment like your super fund or your savings account. We will see short-term cycles that favour certain sectors. Still, there is a clear long-term trajectory that is a strong tailwind supporting better management of ESG issues within a portfolio that continues to underpin long-term investment outcomes.

Q. There has been a lot in the press about greenwashing lately. What are your thoughts on this, especially through the lens of those investors wanting to invest responsibly but are concerned about being misled?

With an increasing demand for responsible investment products, there’s been a surge in new investment products on the market to serve this demand. This leads to a situation where there is a risk of greenwashing—investment organisations making unsubstantiated or misleading claims regarding their responsible investment practices and products, resulting in consumers investing in a fund that is not doing what investors expect they are doing.

Encouragingly, our regulator has signalled it will take enforcement action against investment managers that are found to be greenwashing, which will help steer managers to ensure they have the appropriate processes and policies to back up their claims. What we find when assessing products through our Responsible Investment Certification Program* is that it’s very rare that someone sets out to mislead investors intentionally. But it’s the disjunct between what it says on the packet and what investors expect to see inside that needs to be fixed. That requires investment managers to improve the clarity and precision in how funds are labelled and described, to ensure funds are true to label and not misleading consumers.

*RIAA’s Responsible Investment Certification Program is the leading initiative for distinguishing quality responsible, ethical and impact investment products and services in Australia and New Zealand. RIAA’s Certification Symbol is used to differentiate quality, true to label responsible investment products which meet the Responsible Investment Standard.  

Source: https://responsibleinvestment.org/resources/benchmark-report/

The information contained in this article represents the views and opinions of Simon O’Connor, who is not affiliated, associated, authorised, or endorsed by us. In addition, this information is intended for educational purposes only, and does not take into account your objectives, financial situation and needs. For further information or clarity on anything that has been discussed in this article, please consider seeking qualified and professional advice.

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