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Ethical investment gathering momentum

Nicki Bourlioufas  |  07 Mar 2017Text size  Decrease  Increase  |  

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Interest and demand for ethical investments is growing, and the Morningstar Sustainability Rating can help investors put their money where their values are.


Demand is rising for responsible or ethical investment, as funds flow into the sector from mainstream funds and the product offering is growing as more investment managers join the trend.

According to the most recent statistics from the Responsible Investment Association Australasia (RIAA), responsible investment constituted $633.2 billion in assets under management (AUM) as at 31 December 2015, around half of all assets professionally managed in Australia (47 per cent).

Core responsible investment funds grew by 60 per cent to $51.5 billion in AUM in 2015, having doubled in two years.

The report notes a trend for environmental, social and governance (ESG) factors to be considered seriously by investors keen to work to solve some of society's and the environment's biggest challenges.

Reflecting the rising importance of the sector, Morningstar launched its global Sustainability Ratings in July 2016, using a methodology created in partnership with Sustainalytics, an ESG ratings specialist.

The ratings provide a reliable, objective way to evaluate how investments are meeting ESG criteria, helping investors to put their money where their values are.

The ratings are now available for more than 20,000 funds worldwide and can be found on the right-hand side of fund quote pages on Morningstar.com.au.

Tim Murphy, Morningstar's director of manager research, says the ratings make it possible to identify funds that meet ESG criteria even if they aren't marketed specifically as being socially responsible products.

"The ratings are applied to all funds, not just to an ESG fund. A fund may present itself as being an ESG fund, but there are other managed funds that may meet ESG criteria based on Morningstar's ratings, even though they may not be marketed that way to investors. Our evaluation procedures will help to reveal those funds," Murphy says.

An important consideration for investors is how ethical investments perform. Murphy says the jury is still out, though over the short term, it may be that an ESG fund may be doing better than a non-ESG fund because the investments it has are doing well on a cyclical rather than a longer-term basis.

According to Rice Warner, statistical evidence on superannuation funds suggests the rates of return between ethical investment options and non-ethical investment options do not vary materially.

"However, the small amount of assets in these options usually means they are more expensive as they lack scale benefits," Rice Warner says in a recent report on ethical investments.

"This has created a risk that superannuants will trade off their emotions against value in products. Unfortunately, this risk has been realised, with some products on the market which appeal directly to a member's sense of social obligation, charging exorbitant fees as shown in the table below."


Table 1: Fees incurred on a $250,000 account invested in an ethical investment option*


* The new ethical funds and Australian Ethical also charge a buy-sell spread.


Rice Warner warns that the impact of these high fees on account balances can be enormous over time and should be better disclosed to investors.

Morningstar's Murphy adds that managed funds that are labeled "ESG" or "ethical" are generally also more expensive than non-ESG funds.

But the Responsible Investment Benchmark Report 2016 says ethical funds have performed strongly. That report analysed the performance of "core responsible" investment funds compared with their benchmark index and the average of equivalent mainstream funds and outperformance of ethical investments across several Australian equities, international equities, and balanced managed funds over several different time periods.

ESG investment manager, Australian Ethical, also says its funds consistently outperform. "Karma delivers dividends" its website declares, and promotes its Australian Shares Fund [3921] as being ranked first over 10 years in the recent Mercer Investment Performance Survey, August 2016.

The listed investment manager recently reported strong interest in its products. Australian Ethical's half-year revenue to 31 December 2016 increased 22 per cent to $13.3 million, up from the $10.9 million recorded for the previous corresponding period.

Funds under management (FUM) for the half year lifted 31 per cent to $1.84 billion, up from $1.40 billion a year earlier, with significant member growth, net inflows, and positive investment performance driving that figure up. Underlying profit after tax was $2.3 million, up 52 per cent.

"We're clearly demonstrating that ethical investing has truly come of age and can deliver strong investment returns while having a positive impact on our planet," said Australian Ethical managing director Phil Vernon.

That is drawing other ESG product providers into the investment market. The newly launched BetaShares Global Sustainability Leaders ETF (ASX: ETHI), for example, provides a cost-effective option for ethical investment for those who are fee and climate-conscious.

The ETF tracks an index consisting of 100 large global stocks from developed markets (excluding Australia) that have been identified as "climate leaders".

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.