Kate O'BrienSustainable investing has become a major focus for investors globally, with a third of all investable assets predicted to be managed with this approach by 2025.

Environmental, Social & Governance

Otherwise known as ESG investing, sustainable investing is the practice of considering environmental policies, social implications and corporate governance in addition to the traditional financial and operational metrics, when making investment decisions.

Historically, it was believed that companies engaging in socially and environmentally responsible activities and strong corporate governance would be disadvantaged by higher operating costs. However, numerous studies support the view that companies which are sustainably managed, can and do produce financial and investment returns that are at least equal to those that rank lower on the sustainability spectrum.

Sustainable Investing vs. Socially Responsible Investing

Investing to benefit from ESG considerations (sustainable investing) is quite different to Socially Responsible Investing, though the terms can often be confused.

Socially Responsible Investing (SRI) involves actively removing or choosing investments based on specific and personal ethical guidelines, some or all of which may have significant implications for the return and risk achieved. Hence, investors who choose to invest along certain Socially Responsible Investing lines should be willing to sacrifice investment efficiency for personal ethics.

ESG Investing is Long-Term Risk Management

In contrast, sustainable investing is not just about values, it is about managing risks that affect all investors. While environmental, social, and governance issues may appear to have little in common, collectively they have been deemed the most important systemic issues which can impact a firm’s long-term success.

Environmental considerations include carbon emissions, energy efficiency, water scarcity, waste management, and pollution mitigation. Social considerations include diversity and workplace policies, labour standards, supply chain management, and customer privacy. Governance factors considered include board structure, executive compensation, political contributions, and bribery and corruption oversight.

There are numerous examples of the failure to manage ESG risks, which have negatively impacted the value of associated investments. For example, corporate governance failures often result when firms prioritise near-term results over the interests of long-term investors and lack appropriate risk oversight. A notable example is Enron, which was named “America’s most innovative company” by Fortune Magazine, 6 years in a row. Its share price plummeted from US$90.75 to $1 in 18 months and the company subsequently went bankrupt, taking with it $75 billion of shareholders’ funds and the pension entitlements of numerous employees. Lucrative consulting assignments awarded to the firm’s auditors led to a catastrophic failure of audit standards as conflicting interests resulted in huge debts being ignored.

Assessing Sustainability

To implement our ESG strategy we utilise our global research partner (Morningstar) and their subsidiary Sustainalytics, which is a market leading provider of research and ratings on the ESG credentials of entities. Utilising their tools enables us to consider the credentials of many investments we make as well as the overall portfolio.

We also do our own qualitative research into each managed fund to determine how ESG risk factors are incorporated into the investment decision-making process, often through discussion between our Investment Committee and the fund managers.

The Broader Investment Strategy

Whilst ESG is important, it is one component of our broader investment approach, which is based on diversification for higher long-term yield with lower risk, and the use of managed funds which supports greater diversification and specialist research.

If you are interested to receive further information on ESG, or if you would like to discuss any aspect of our investment approach, please contact me on (02) 9908 9888, or email wealth@edneyryan.com.au.