As Australia stares down the barrel of another bushfire season, and coronavirus continues its global rampage, retail investors are increasingly voting with their feet and putting their cash behind funds and stocks with favourable environmental, social and corporate governance policies.
ESG compliance has gained momentum over the past decade pushing companies to improve on their environmental and social policies while increasing transparency – however, more is needed.
Back in October 2014, several major miners got a shock when the Australian National University made a very public decision to divest its holdings.
The university had commissioned a review of its holdings in relations to environment, social and governance ratings.
This led to the university dumping its stake in Iluka Resources (ASX: ILU), IGO Ltd (ASX: IGO), Newcrest Mining (ASX: NCM), Sandfire Resources (ASX: SFR), Oil Search (ASX: OSH), Santos (ASX: STO) and the former Sirius Resources before it was acquired by IGO.
The dumped stocks represented about 5.1% of the University’s Australian equity holdings.
Unsurprisingly, the decision was a signal to companies to sort out their ESG policies and conduct.
It also set a new tone for the Australian market – showing the power that can be wielded when making investment decisions.
By August this year, BHP had confirmed it was pulling away from its thermal and coking coal assets including divesting the Australia-based Mount Arthur thermal coal mine, and the Cerrejon coal project in Colombia.
Prompting the move was a decision from Norway’s trillion-dollar fund to transition the major to its observation list – meaning it would look at divesting its $2 billion holding.
In this space, Rio was a faster mover than BHP – offloading it final coal assets in 2018. However, it came under fire this year after it destroyed a 46,000-year-old sacred Aboriginal site to make way for an iron ore mine expansion.
The public outcry led to heavy criticism from some of the major’s largest investors.
Mounting pressure resulted in an apology and the rolling of several executive heads including chief executive officer Jean-Sebastien Jacques – showing again the power investors possess.
ESG investments become increasingly popular
As COVID-19 continues rampaging, along with rising greenhouse gas emissions and climate change, ESG-focused investments are becoming increasingly popular among institutional, sophisticated and retail investors.
Additionally, Australia’s Reserve Bank’s recently released Financial Stability Review has put even more credence into ESG investing after the report noted climate change was a risk to the financial system.
Morningstar director, manager research and co-author of Sustainable Investing Landscape for Australian Fund Investors Grant Kennaway pointed out retail investors are “increasingly aware” of the importance of backing sustainable funds and companies and the risk climate change poses.
He added while superannuation funds use their voting power, so, too are retail investors with where they put their cash.
“At the end of the second quarter of 2020, Morningstar estimates that Australian retail assets invested in sustainable investments amounted to $19.9 billion, a 21% increase compared with 30 June 2019,” he said.
Mr Kennaway added that investment options and assets in sustainable funds within the Australian retail marketplace continue growing.
In Australia, the sustainable fund market is relatively small, with 10 new funds launched between the start of 2020 and the end of August.
Morningstar has currently identified 108 individual sustainable strategies that are available to retail investors.
Best performing ESG funds in FY 2020
According to Canstar, investing ethically doesn’t mean low returns with the research agency revealing the top 10 performing ESG funds between July 2019 and June 2020.
These include AXA IM Sustainable Equity Fund which excludes investing companies involved in tobacco and arms.
BetaShares Global Sustainability Leaders ETF aims to invest in the 100 top global leaders (excluding Australia) in climate sustainability.
Any stocks exposed to the fossil fuel sector are excluded.
BetaShares Australian Sustainability Leaders ETF was incorporated to back “sustainability leaders” on the Australian market and eliminating any companies with exposure to fossil fuels.
Australian Ethical Emerging Companies Fund puts its money into small cap companies based on their social, environmental and financial credentials.
The Aphinity Sustainable Share Fund has a diversified portfolio of ASX stocks with strong ESG characteristics.
According to Canstar, the Australian Ethical Advocacy Fund invests in ESG companies around the globe as well as those who advocate for improved ESG practices.
The Australian Ethical Diversified Shares Fund seeks to back companies that it identifies as having a positive impact on the planet including combating pollution, poverty, preserving endangered ecosystems or developing sustainable land use practices.
Meanwhile, the Australian Ethical International Shares Fund invests in international companies that have positive ESG practices.
U Ethical Australian Equities Portfolio puts its cash into companies that promote human welfare, dignity and environmental sustainability.
And, the Candriam Sustainable Global Equity Fund backs stocks that are on the MSCI World Index. Excluded from any investment are companies involved in tobacco, animal cruelty, nuclear power, labour rights violations etc.
Call for greater stock holdings transparency
As evidenced in Canstar’s top performing funds in FY 2020, investment exclusions and inclusions vary with each fund.
Mr Kennaway and Morningstar analyst and Sustainable Investing Landscape co-author Peter Gee also noted that if Australian retail investors want to avoid any exposure to fossil fuels, funds need to be more transparent in the stocks they hold.
Morningstar’s Global Investor Experience study, which was published in April, put Australia as below average in relation to investor-friendly markets.
“Australia continues to have no requirement for mutual funds to publish a full and complete disclosure of portfolio holdings, making it a laggard in this important area,” the report stated.
As Mr Kennaway and Mr Gee point out this lack of requirement leaves ESG investors in the dark about what holdings a sustainability fund may actually have and where their money is essentially going.