Consumers still confused about SRIs

There may be a general perception that sustainable responsible investment (SRI) is a soft issue, but you know it is growing in importance when it becomes the subject of a Federal Parliamentary inquiry.

Earlier this year the Parliamentary Joint Committee on Corporations and Financial Services held an inquiry into corporate social responsibility, a large part of which revolved around the question of SRI and the approach being adopted by major corporates and others in Australia.

One of the key submissions to that inquiry was provided by the Financial Services Institute of Australasia (FINSIA), which based its approach on a research project conducted earlier in the year. What that research uncovered suggested that community sentiment with respect to SRI is far stronger than many financial services firms may have imagined.

However, the research also found that while Australians may favour the broad concept of SRI, few understand the interaction between investment and sustainability.

As part of its research, FINSIA conducted focus groups and the preliminary findings were that Australians:

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~ are significantly concerned about issues that arise from corporate operations — especially environmental and labour concerns;

~ have difficulty understanding how their ethical or moral concerns can be expressed through their investment choices, and therefore influence corporate behaviour; and

~ will willingly select SRI options once they understand that SRI fund options are available and have a proven track record in not only matching, but also outperforming the market index.

“In short, Australians are concerned by corporate behaviour, but do not have sufficient understanding of how investments can influence that behaviour,” the FINSIA submission said.

“More investments could be directed to SRI superannuation and other managed funds, if industry [and Government] took a more active role in educating Australians about SRI.”

The FINSIA survey analysis said environmental, social and governance issues had significant resonance with Australians, who were very concerned about the natural environment and particularly weather patterns — drought and severe storms — as symptoms of global warming.

“There is a belief that things have to change and companies, just as individuals, have to be more environmentally aware,” it said. “Increasingly, consumers are conscious of making or trying to make sustainable investments.”

The survey revealed that while consumers were familiar with terms such as ‘sustainability’, ‘governance’ and ‘risk’, few had actually heard about SRI.

“Conceptually, ‘sustainable investments’ resonates more immediately with Australians than does SRI,” the survey analysis said.

It said that, primarily, investors looked for a stable company with evidence of steady and sustainable growth, perceiving such companies to be good investments because they provide asset growth and income.

“Increasingly, investors are using their own ‘moral compass’ to guide some of their selections,” it said. “Consequently, issues such as governance, worker conditions and the treatment of consumers are impacting on investment decisions.”

The FINSIA survey makes clear that there is a need for further consumer education in circumstances where “most people do not know how to connect their ethical beliefs with their investment choices”.

“Although the industry may consider SRI investing to have had a relatively long lead-time, many consumers have only recently begun to formulate a response to the need to make more informed investment decisions,” the survey said.

“They tend to be drawn to ‘green’ companies because they are easy to spot and understand rather than address the wider decision-making associated with socially responsible investing.

“However, while a company’s success [sic], their contribution to society, environmental credentials and workforce treatment creates interest and does generate a more positive image among consumers, they remain highly sceptical of major corporations,” the survey analysis said.

It said that “spin” was a word frequently used by consumers to describe corporation actions.

“Consumers are aware of the need for this type of promotion to take place, but more credence is given to actual corporate behaviour,” the analysis said.

The FINSIA research suggests that while many Australians do not realise what SRI options are available, if made aware of the options they would allocate a part of their investment portfolio to SRI.

“Traditionally, most Australians, when given the choice between an investment with higher returns and an investment in an ethically responsible company, which contributes to society or the environment, the majority would have chosen higher returns,” it said.

However, FINSIA said its survey indicated support for the pathway of simply achieving higher returns was beginning to weaken, especially among younger Australians.

“Within an overall portfolio of pooled investment, such as a managed or superannuation fund, there is a willingness to place a share usually less than 20 per cent and more likely 10 per cent in an SRI,” it said.

“This is a signal that interest is growing and translating into investment decisions.

“Australians are more likely to regard ethical investment trade-offs with lower returns in a portfolio of mostly mainstream investments,” the research said.

“A few participants were able to make the connection between ‘best practices’ and higher long-term returns. But this was a minority position and indicates that further education is required for consumers to understand the links between CSR [corporate social responsibility] and good investments.”

The FINSIA submission said that with a deeper understanding of SRI and its processes and given how consumers are using their own moral compasses, it was reasonable to expect that investment proportions would quickly move to SRI.

“Clearly, industry faces the challenge of raising the prominence of SRI investment options with investors, both at the level of financial planning [more advisers need to be aware of SRI investments] and at the level of education — giving investors information on how companies are screened or weighted according to their nominated CSR activities.”