Green investments: a bright idea blossoms

Louise O’Halleron is straight down the line when it comes to ethical investments.

The head of Australia’s Ethical Investments Association (EIA) is not interested in reading another fluff piece on why investors should ‘go ethical’. She has read it all before and believes the industry is ready to move on.

O’Halleron also isn’t interested in dredging up the past five years of Australia’s observations of the ethical industry; including industry gripes surrounding negative screening, value growth and ‘light green’ products. In her view, what has needed to be said has been said.

The new focus now needs to fall on creating better ethical advice and knowledge from the top-tiered fund managers and dealer groups, down to the advisers and investors.

The solution, O’Halleron said, stems from the EIA’s new financial services certification program.

“The whole idea behind the program is it offers an informed choice for the consumer. That informed choice includes choice about which adviser I choose, who’s trained to give advice, what products are out there and what product methodology they [the adviser] use, and what is the stockholdings of those products in full — not just the top 10 — and what’s their past performance,” she said.

O’Halleron said in establishing the program, the EIA looked at the issues the industry and consumers faced and put them “all on the table”, with the end result being the launch of the certification program in 2005. The program is being touted as a world first, and interest in the model has been as far reaching as Canada and Europe, with both planning on modelling it for their own financial community.

“It’s the first in the world and is currently being modelled in Canada and Europe at the moment. They are doing stakeholder consultations. They are doing it really properly. They’re not jumping into it. I’ve had someone come out; they’ve hired consultants; they’ve come to Australia,” O’Halleron said.

“I presume they’re serious about it, but they’re asking questions. It’s funny, when we came up with the idea everybody said ‘great’, this is about getting people into the industry and training [them] properly and raising professional standards and branding, and what can be wrong with that? Everyone in the world is really interested in it, but they are going through very long processes.

“I suppose it’s easy for me to say this as we’re three-and-a-half years down the track and we’ve devoted almost all our resources to it, so I suppose you’d be looking to ask, ‘Is it worth it?’. I absolutely think it’s worth it. It’s important that the system is really strong and, like anything that is growing, you always feel like you could do with more resources to make it perfect — that’s just my view.”

As part of the certification program, O’Halleron said a training program for financial advisers was also developed.

Born in July 2003, the course was initially written by EIA manager and senior adviser Janice Carpenter, and later updated by O’Halleron. The EIA then took the next step of aligning itself with SAI Global — a publishing, compliance, training and assurance organisation — which built the financial adviser online course. The three-hour, interactive course was launched in September last year.

“Since then, [the course] has been taken up by individuals, but the way that it is going to enter the market fully is via dealer groups. So we’ve been visiting dealer groups since the beginning of the year. Every one that we’ve approached has had a positive to very positive response. I haven’t encountered any barriers at all. In fact, what I’ve found is that it seems to be just the right time.

“We seem to have struck at a time when advisers feel they’re needing skills in this area. I’m also seeing good feedback; the very first large dealer group that we’ve connected with said, ‘This fits in beautifully with us encouraging our advisers to have more interaction with our clients on issues of values and beliefs’. It also provides a safe framework for it and enables the adviser to manage a conversation like that so it doesn’t ramble off into the woods,” she said.

Research released last year supports O’Halleron’s claim that the advisory and investor industry are indeed ready to take a longer look at ethical investments. EIA’s 2006 SRI Benchmarking Survey revealed sustainable responsible investment (SRI) funds under management in Australia grew from $7.67 billion to $11.98 billion in the year to June 30, 2006, with wholesale portfolios representing 62 per cent ($7.87 billion) of this amount.

In the past 12 months total SRI assets have grown at a rate of 56 per cent, while cumulatively over the past six years they have increased by 3,587 per cent (or 36 times).

By comparison, growth in total investment management, including all types of standard managed portfolios, grew by 15.5 per cent in the year to June 2006.

The next step, according to O’Halleron, is to get superannuation funds more involved. She said the EIA has been working with super funds on trying to help them market their options, because while they offer SRI as an option, very few consumers invest in the option due to a lack of understanding of the product.

“This year we’ll be conducting a big consumer campaign through membership magazines; things like nurses and doctors and all those people who you think will probably understand it. Other areas of target will be Rotary, National Trust, people who surf and people who do pilates, woman, health, fitness, fishing, unions and teachers.

“We’ll be going out to those magazines trying to explain to people that they can come to our website and they can find managed funds; they can read and compare and contrast what each of them does, so if they ring an adviser they’ll feel more comfortable.”

O’Halleron said the level of comfort for an individual investor rests on their own knowledge of the ethical sector. She said while there is indeed a demand for ethical options, there is still a lack of knowledge surrounding what’s ethical and what’s not. This, she said, is broken down into the different shades of ‘green funds’.

“No one product is worse than the other or no better than the other. It’s not like that. Just because something is ‘light green’ doesn’t mean it’s bad. It just means the fund manager has developed a ‘light green’ product because they think it will suit more people,” O’Halleron explained.

“That’s why they’re doing it. It’s not because they’re trying to get away with it lightly. It may not go too far into the positive screening, but maybe people don’t necessarily need that. So it’s not a good or bad thing. And at times you get a little tired of hearing, ‘Oh, they’re so light green’, but then you think, ‘Has it ever occurred to you that a lot of people might want that?’.

“It’s just really arrogant to think that everyone wants to be in a ‘deep green’ fund. Lots of people do, but lots of people these days — as the number of people concerned about the environment grow into the mainstream — you’re not going to get them all to go ‘deep green’. We happen to have one of the best ‘deep green’ funds in the world in Australia. In fact, we’ve probably got the most unique and successful product in Australia with … Australian Ethical — and I’m not plugging them, it’s just that it’s a unique product in the world and we’re very lucky to have it. And we’re also lucky to have this shopping cart of other strong products,” she added.

O’Halleron said she believes creating an extensive online resource is a good first step to re-educating consumers on issues of ethical investments.

“What we wanted to do is to say to people that you can actually go shopping on the website and go and look at these things. We’re hoping people will use the website and have an informed choice about where they’re going, and they’ll be able to read about the adviser and where they work and whether they’ve done the course and how long they’ve been in practice and whether they charge fees, commissions or both. We’ll have all this information that will help people select the right adviser for them,” she said.

For O’Halleron, bringing ethical issues to the forefront has taken a long time, but it’s now all starting to fall into place.

She said after sitting down and looking over different surveys that had been done with “the person on the street”, there was a large percentage of people wanting to invest in ethical, though at present they believed they did not know enough about the sector to part with their money just yet.

O’Halleron said one survey she looked at, out of 1,000 responses, 800 people wanted an ethical investment option as part of their industry super fund.

“I think superannuation is really important. And most of the surveys done around super are all very strong, as most of them are around industry funds, so you’re going to get fairly low hanging fruit in those locations. So for all of these reasons, I believe the certification program solves a lot of the issues that had previously been raised through the media and by individuals, and they were fair. They’re fair enough observations [about] how do people tell. And some of the fund managers certified are independently verified by Grant Thornton, which is great.”

So what about those still critical of Australia’s past efforts in ethical investments; the days when companies rushed to add a green fund to their menu in an attempt to snare investor dollars and bridge the gap?

“Some of those have left the space. I’ve found there was a drop off. There never were many players in the market anyway. There’s only ever been between 12 and 15. In the beginning, some of them came on board around 2000 and left around 2002 … they were clearly not committed enough,” O’Halleron said.

“And some of the comments were, ‘Well, people are not investing in them’, and then you’d turn around and say, ‘Well, talk to AMP and BT and there are plenty of investors’. So, it’s about how much work you put into it, and it’s about how much you staff it.”

Going a step further, O’Halleron said there are a couple of stages you would call ‘light green’, which is simply a negative screen where certain industries are screened out, such as gambling, tobacco, or any company involved in animal testing. Though, she said once those industries are removed the investor is left with the rest of the stock exchange, which is a rather large leftover.

She said the next stage is where an investor has a fund that analyses the remaining companies and their impact on society and the environment.

The third stage is where the fund actively seeks out excellent sustainable companies. And then the other process, outside of the screening, is best of sector, where you don’t screen out industries but instead select companies based on how they rank within their sector for performance on environment, social and governance issues.

“Those best of sector funds don’t deal quite so much in the ethical realm as in the sustainability realm, so there are some distinctions there. So I think it’s fair to say that a fund that only does negative screening would call itself ‘light green’.

“I don’t think I’d be calling people names if I said that, I think they’d probably agree with that themselves,” O’Halleron added.