The shift to environmental, social and governance (ESG) investing

Environmental, social and governance (ESG) considerations are becoming increasingly important to Self Managed Superannuation Fund (SMSF) trustees for their long-term benefits to a portfolio. ESG Investing is a term that is often used in the same manner as sustainable investing, socially responsible investing, mission-related investing, or screening and is quickly becoming part of the mainstream.

ESG in the investment context, are core issues which have the potential to impact upon a company’s financial performance or reputation. Different from solely ethical or sustainable investments, ESGs are a holistic measure for companies and deal with issues which are typically excluded from traditional investment analysis.

According to the Australian Financial Review, ESG investment opportunities have significantly increased over the last two years after a fairly stagnant decade. It is becoming increasingly evident that investors are seeking to align their long-term SMSF investment strategy to their underlying personal beliefs and values. Investors concerned about climate change are turning their investment attention to renewable energy. Those worried about the under-representation of women in executive roles are placing greater value on companies that actively participate in gender diversity. If the big earnings of CEOs doesn’t sit right, investors are looking to invest in organisations which offer full transparency, fair and accountable executive compensation. The choice is in the hands of the investor to make decisions and investments which they are more comfortable with. In the long term, the potential, the risks, and the alignment are with their values.

The tragedy caused by the COVID pandemic has been another significant driver for the rising awareness of global sustainability among investors and the desire of investors to take control of their superannuation investments and have them aligned with their personal beliefs. The market collapse at the beginning of the pandemic has served as a harsh reality check for many Australians and has brought to light the importance of not only taking control of your retirement savings but also the desire to invest in a positive future for the planet.

James Harwood, a senior portfolio manager at Russell Investments, recently stated that while the focus of ESG investing in its early stages had been on environmental concerns, following a number of governance scandals with major Australian companies over the last 12 months, the “S” and “G” aspects were coming to the fore just as strongly. “The demand for ESG is going to broaden. ‘E’ is going to be the biggest focus but we do expect that the social and governance aspects are going to become a greater focus for investors as well.”.

It is no longer acceptable for a company to be purely driven by profits. Fund managers are experiencing strong inflows into their ethically focused products and traditional blue-chip companies are now branching out into renewables following pressure from shareholders to do more around environmental sustainability.

In line with ATO requirements, SMSFs should have an investment strategy in place and have regard to diversification. The investment strategy needs to consider the risks involved in making, holding and realising, and the likely return from the fund’s investments. With current trends, ESG investing is likely to play a major role in future SMSF investment strategies.