Sustainable investing on the rise
Sustainable investing is not new, but in recent years it’s moved from the green fringes into the mainstream. From climate change to animal rights and gender diversity, more people are interested in aligning their money with their values.
Last year alone, Australia’s sustainable investment market increased 20 per cent to a record $1.5 trillion. According to its 2022 benchmark report, the Responsible Investment Association Australasia (RIAA) found sustainable investments now represent 43 per cent of total professionally-managed funds.
In addition to traditional shares and fixed interest you can buy sustainable investments in a wide range of assets, including property, alternatives such as forestry and farmland, infrastructure, private equity and cash.
These days, most big super funds offer a sustainable investment option and some even offer this as their default option. You can also buy sustainable managed funds, including a growing list of exchange-traded funds (ETFs).
So what are sustainable investments and how can you tell?
Focus on people and planet
Sustainable investing is also known as ethical, responsible and ESG (environmental, social, governance) investing. But whatever the name, the focus is on people, society and/or the environment instead of an exclusive focus on financial returns.
Sustainable investments are selected using a variety of screening methods, including:
- Positive screening selects the best investments in their class
- Negative screening excludes harmful sectors, companies or activities such as arms, gambling, animal testing, tobacco and fossil fuels
- Norms-based investing screens for minimum standards of relevant business practices
- Impact investing has the explicit intention of generating positive social or environment impacts.i
Increasingly, the term ESG investing is used when a fund or company commits to sustainable investing in these three areas:
- Environmental, including air and water pollution, biodiversity and climate change
- Social, including child labour and labour standards, ethical product sourcing, gambling and human rights
- Governance, including board diversity, corruption, business ethics, corporate culture and whistle-blower schemes.
While climate change is a strong theme these days, the RIAA report found gender diversity and women’s empowerment are gaining popularity.
Yet despite the focus on making the world a better place, sustainable investing is not all warm and fuzzy. Performance still matters.
Performance gains
In the early days, sustainable investing often came at the expense of returns but that is no longer necessarily the case.
The RIAA report compared the performance of what it terms responsible investment funds and mainstream investments funds (on average and net of fees) over the past 10 years to December 2021.
As the table shows, responsible multi-sector growth funds consistently outperformed mainstream funds and their benchmark over 1, 3, 5 and 10 years. Responsible Australian share funds generally outperformed or were on par with mainstream funds. Only responsible international share funds disappointed, underperforming mainstream funds across all timeframes.
Performance of responsible investment funds vs mainstream funds and benchmarks
| Fund categories/benchmark | 1 Year | 3 Year | 5 Year | 10 Year |
| Responsible investment multi-sector growth funds | 16.1% | 14.0% | 10.6% | 10.9% |
| Morningstar category: Australia multi-sector growth | 14.1% | 10.9% | 7.9% | 8.8% |
| Responsible investment international share funds | 18.1% | 17.3% | 12.3% | 11.3% |
| Morningstar category: Australia Equity World Large Blend | 24.6% | 18.1% | 13.4% | 15.1% |
| Responsible investment domestic shares (Aus/NZ) | 16.6% | 14.8% | 11.8% | 11.2% |
| Morningstar category: Equity Australia Large Blend | 18.3% | 13.7% | 9.3% | 10.1% |
| S&P/ASX 300 Total Return | 17.5% | 14.0% | 9.9% | 10.8% |
Source: RIAA Responsible Investment Benchmark Report Australia 2022
Watch out for greenwashing
Not surprisingly, increased investor demand for sustainable investments has led to a rapid increase in the number of products available. The rush to cash in on the trend has sometimes led to what is known as ‘’greenwashing”.
The Australian Securities and Investments Commission (ASIC) describes greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.
ASIC warns investors to look beneath the green label at the fine print. For example, a fund might describe itself as ‘’no gambling” but the product terms say it may invest in companies that earn less than 30 per cent of revenue from gambling.
It’s also important not to rely on vague language such as “considers”, “integrates” or “takes into account” sustainability-related factors, but to look for a clear explanation of how the product will achieve its aims.
Australian companies lifting their game
It’s not just super funds and managed funds taking sustainable investing more seriously. For investors who like to invest directly in shares, Australian listed companies are also adapting to changing investor preferences and regulatory environment.
In a recent analysis of ESG reporting by Australia’s top 200 listed companies, PwC found the bar has been raised following the formation of the International Sustainability Standards Board (ISSB) in 2021, but there is still work to be done.
PwC found a 13 per cent increase in companies declaring a commitment to net zero emissions. However, only 55 per cent of those disclosed a transition plan or activities that will enable them to reach net zero.
There was also a 10 per cent increase in companies disclosing climate risks and opportunities, and a 30 per cent increase to 77 per cent of companies now disclosing a gender diversity policy.
For investors seeking sustainability along with financial returns from their investments, momentum and choice is growing. So please get in touch if you would like to discuss your investment options.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust and Wolrah Holdings Pty Ltd ABN 88 651 566 602 all t/as Queensland Financial Group are Corporate Authorised Representative’s of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Market movements & review video – February 2023
Stay up to date with what’s happened in the Australian economy and markets over the past month.
China’s plans to kickstart its economy after the pandemic shutdown have been dominating the news this month and will have worldwide implications, not the least for Australia.
Australian shares were up nearly 8% in January while US stocks climbed by about 5% but the markets are nervously waiting for expected increases in interest rates by major central banks this month to help curb inflation.
Click the video below to view our February update.
Please get in touch if you’d like assistance with your personal financial situation.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust and Wolrah Holdings Pty Ltd ABN 88 651 566 602 all t/as Queensland Financial Group are Corporate Authorised Representative’s of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
2022 Year in Review
The year began on an optimistic note, as we finally began to emerge from Covid restrictions. Then Russia threw a curve ball that reverberated around the world and suddenly people who had never given a thought to the Reserve Bank were waiting with bated breath for its monthly interest rate announcements.
2022 was the year of rising interest rates to combat surging inflation, war in Ukraine and recession fears. These factors combined to create cost-of-living pressures for households and a downturn in share and bond markets.
Super funds also suffered their first calendar year loss since 2011. Ratings group Chant West estimates the median growth fund fell about 4 per cent last year.i While this is bad news for members, it’s worth remembering that super is a long-term investment, and that the median growth fund is still 11 per cent above its pre-Covid high of January 2020.ii
|
Australia key indices December |
Share markets (% change) Year to December |
||||
|
|
2021 |
2022 |
|
2021 |
2022 |
|
Economic growth |
4.6% |
*5.9% |
Australia All Ordinaries |
13.6% |
-7.2% |
|
RBA cash rate |
0.1% |
3.1% |
US S&P 500 |
27.0% |
-19.3% |
|
Inflation (annual rate) |
3.5% |
^7.3% |
Euro Stoxx 50 |
20.9% |
-11.7% |
|
Unemployment |
4.2% |
#3.45% |
Shanghai Composite |
4.8% |
-15.1% |
|
Consumer confidence |
104.3 |
82.5 |
Japan Nikkei 225 |
4.9% |
-10.9% |
*Year to September, ^September quarter # November
Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics
The big picture
Even though investors have come to expect unpredictable markets, nobody could have predicted what unfolded in 2022.
Russia’s invasion of Ukraine in February triggered a series of unfortunate events for the global economy and investment markets. It disrupted energy and food supplies, pushing up prices and inflation.
Inflation sits around 7 to 11 per cent in most advanced countries, with Australia and the US at the low end of that range and the Euro area at the higher end.iii
As a result, central banks began aggressively lifting interest rates to dampen demand and prevent a price and wages spiral.
Rising inflation and interest rates
The Reserve Bank of Australia (RBA) lifted rates eight times, taking the target cash rate from 0.1 per cent in May to 3.1 per cent in December.iv This quickly flowed through to mortgage interest rates, putting a dampener on consumer sentiment.
Australia remains in a better position than most, with unemployment below 3.5 per cent and wages growth of 3.1 per cent running well behind inflation.v
Despite the geopolitical challenges, Australia’s economic growth increased to 5.9% in the September quartervi before contracting to an estimated 3 per cent by year’s end, in line with most of our trading partners.vii
Volatile share markets
Share investors endured a nail-biting year, as markets wrestled with rising interest rates, inflation, and the war in Ukraine.
Global shares plunged in October on interest rate and recession anxiety only to snap back late in the year on hopes that interest rates may be near their peak. The US market led the way down, finishing 19 per cent lower, due to its exposure to high-tech stocks and the Federal Reserve’s aggressive interest rate hikes. Chinese shares (down 15 per cent) also had a tough time as strict Covid lockdowns shut down much of its economy.
Australian shares performed well by comparison, down just 7 per cent, thanks to strong commodity prices and the Reserve Bank’s relatively moderate interest rate hikes.
Energy and utilities stocks were strong due to the impact of the war in Ukraine on oil and gas prices. On the flip side, the worst performers were information technology, real estate and consumer discretionary stocks as consumers reacted to cost-of-living pressures.
Property slowdown
After peaking in May, national home values fell sharply as the Reserve Bank began ratcheting up interest rates. The CoreLogic home value index fell 5.3% in 2022, the first calendar year decline since the global financial crisis of 2008.
As always though, price movements were not uniform. Sydney (-12 per cent), Melbourne (-8 per cent) and prestige capital city properties generally led the downturn. Bucking the trend, prices continued to edge higher in Adelaide (up 10 per cent), Perth (3.6 per cent), Darwin (4.3 per cent) and many regional areas.
Rental returns outpaced home prices, as high interest rates, demographic shifts and low vacancy rates pushed rents up 10.2 per cent in 2022. Gross yields recovered to pre-Covid levels, rising to 3.78 per cent in December on a combination of strong rental growth and falling housing values. However, it’s likely net yields fell as mortgage repayments increased.
Despite the downturn, CoreLogic reports housing values generally remain above pre-COVID levels. At the end of December, capital cities combined were still 11.7 per cent above their March 2020 levels, while regional markets were a massive 32.2 per cent higher.
Looking ahead
While the outlook for 2023 remains challenging, there are signs that inflation may have peaked and that central banks are nearing the end of their rate hikes.
Even so, the risk of recession is still high although less so in Australia where the RBA has been less aggressive in applying the interest rate brakes.
Issues for investors to watch out for in the year ahead are:
-
A protracted conflict in Ukraine
-
A new COVID wave in China which could further disrupt supply chains across the Australian economy, and
-
Steeper than expected falls in Australian housing prices which could lead to forced sales and dampen consumer spending.
If you would like to discuss your investment strategy in the light of prevailing economic conditions, don’t hesitate to get in touch.
Note: all share market figures are live prices as at 31 December 2022 sourced from: https://tradingeconomics.com/stocks.
All property figures are sourced from: https://www.corelogic.com.au/news-research/news/2022/corelogic-home-value-index-australian-housing-values-down-5.3-over-2022
i https://www.chantwest.com.au/resources/another-strong-month-for-super-funds-as-recovery-continues/
ii As above
iii https://tradingeconomics.com/country-list/inflation-rate
iv https://www.rba.gov.au/statistics/cash-rate/
v https://www.rba.gov.au/snapshots/economy-indicators-snapshot/
vii https://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Market movements & review video – February 2022
Stay up to date with what’s happened in Australian markets over the past month.
January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling.
Please get in touch if you’d like assistance with your personal financial situation.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.