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Invest like a Rockefeller

Glenn Freeman  |  06 Sep 2017Text size  Decrease  Increase  |  
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Whether you're a hard-core impact investor or a lighter shade of green, if you're an SMSF trustee, your beneficiaries will likely take more interest in ESG investing.


Talk about a handy wedge of pocket change--some 460 billionaires around the world will hand more than $2 trillion to their heirs over the next 20 years.

A similar shift of wealth is happening here in Australia, and not just within the ranks of the ultra-wealthy. Some $500 billion in property assets alone will change hands over the next couple of decades, according to a Bankwest report.

There are various strands of this inter-generational wealth transfer that the finance industry is latching onto. Demand for environmental, social and governance (ESG) investments is in high demand from not only Gen-X, but more-so from Gen-Y and millennial investors.

In the US, the Rockefeller Brothers Fund was valued at around $900 million last year, having spun off its Global Equity Impact Fund, focused on conviction-based strategies aligned with long-term sustainability trends.

In recognition of the market demand and the social imperative, Morningstar's Sustainability Ratings were rolled out across the global Morningstar group in July 2016. This uses a methodology created in partnership with Sustainalytics, an ESG ratings specialist. Around 2,500 Australian funds now carry a Morningstar Sustainability Rating.

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The scores are an asset-weighted roll-up of company scores from Sustainalytics research, with deductions taken for involvement in ESG-related controversies. Sustainalytics has ESG scores on 4,500 companies and controversy scores on 10,000 companies.

Asset managers are falling over themselves to roll out managed funds meeting various ESG criteria. One of the most recent is the Legg Mason Martin Currie Ethical Income Fund.

Its focus on ethically-minded companies, placing an emphasis on income over growth, is a defining characteristic of this fund--though we note it isn't part of Morningstar's fund manager research coverage.

Targeting companies with a low carbon footprint is one of the fund's objectives, as is board diversity--including "over-boarding". Gender diversity is also considered, though a lack of women in company management roles isn't explicitly a criterion for exclusion from the fund.

"We embed ethical values as part of our investment process ... we also want to make sure that any companies that are not deemed acceptable are not included in the investable universe, let alone the portfolio," says Will Bayliss, portfolio manager, Martin Currie Australia.

"Though we don't have a black-and-white view on fossil fuels ... rather than having a blanket ban on companies in fossil fuels, we manage the exposure so that your carbon footprint is a lot less than the index."

He also notes the sector bias that traditional portfolios are exposed to if following index-led approaches: "If you invested in the index, you would be relying on nearly half [of the income] coming from banks, and very little from utilities or telecoms, based on market weighting."

In this portfolio, banks comprise half that of the index, and the fund can't own more than 5 per cent of any single company's stock. "We don't want to own 35 per cent of the banks, in fact our bank weighting is 16 per cent ... it's getting much closer to the GDP picture of Australia," Bayliss says.

"More importantly, if the banks have a hiccup, and in fact we are seeing evidence of that today with issues around CBA, you don't want one-third of your portfolio subject to that risk ... we want that income not to be subject to shocks," Bayliss says.

He says the fund weighs ethical values equally with the investment objectives.

"Does the board and the company have good gender diversity? Is the board structure one of competence? Does management and the board act in the best interests of shareholders? Are these companies using ridiculous amounts of water? These are high-quality and lower-risk assessments of companies," he says.

"When you think about the impact of companies on sustainability, a company with high emissions is clearly not going to be a sustainable company in the long term, just as a company that exploits its workers or over-pays its senior executives is clearly not sustainable ... [nor is one] that gets lots of penalties for environmental breaches on an ongoing basis."

Do you really care?

While the 50-plus demographic is often thought to be less interested in ESG investing, Andy Sowerby, head of Legg Mason Australia, disagrees. He sees an increase in engagement among financial advisers, super funds and charitable trusts, who in turn echo, and influence, the demands of their clients.

He concedes that within ESG investing, "SMSF trustee take-up is perhaps the lowest," but also anticipates that the next "surge in ethical investing will come when the transfer of wealth happens, from baby boomers to the next generation".

"They're the ones that will benefit from the transfer of wealth, and they're the ones driving the future of demand for ethical investing ... all reports and all research shows that for them, there's not even a debate about the correlation between performance and ethical performance," Sowerby says.

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Glenn Freeman is a Morningstar senior editor.

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