How much will the carbon tax cost responsible investors?

The debate around responsible investments has become charged by the controversial and highly discussed carbon tax. However, Janine Mace finds this will not negatively impact the sector.

When it comes to hot topics, they don’t get much more divisive than the debate over the proposed introduction of Australia’s carbon tax. 

As Australian Ethical managing director Phillip Vernon notes, “The carbon tax is like religion and money – it is now not to be discussed at dinner parties”.

The rancorous debate has made anything to do with climate change highly political – just at a time when interest in responsible investment is growing strongly.

However, it is not all doom and gloom for those advocating a responsible investment approach. “Regardless of peoples’ opinions on the issue, it has heightened awareness of climate change and helped to make people think about the issue,” Vernon explains.

“People are turned off by the politics of it, but it has made it easier to engage with them about the issue of climate change.”

Despite the bitterness of the carbon tax debate, those working in the responsible investment space believe it will not have a negative impact.

“A few years ago it was hard to engage people about the investment issues, but not now,” Vernon says.

Perpetual’s manager responsible investment and sustainability, Pablo Berrutti, agrees the controversy is unlikely to affect the broader push towards responsible investment. He believes the debate has made the investment community look more closely at environmental, social, and governance (ESG) risks and their financial impact on Australian companies.

Responsible Investment Association Australasia (RIAA) executive director, Louise O’Halloran, is another who sees the politicisation of the carbon tax debate as having little long-term impact on the shift towards responsible investment.

She believes the consideration of ESG risks in investment decision-making is now so thoroughly embedded in the processes and thinking of large institutional investors and fund managers, it will not be derailed by a mere political bunfight.

“The large investment houses and reinsurers have been investigating the impact of climate change on investment for over 10 years,” O’Halloran says.

“This is an agnostic issue for these people, as they do not want to expose their investors and shareholders to risk. Climate change is an issue for the entire investment community and they will not be swayed by any politicisation, as these processes help minimise risk for investors.”

HNW investors lead the way

This view of responsible investment as a methodology for minimising investment risk has been embraced in Europe, with the top end of the retail market strongly embracing it. 

O’Halloran believes this is a signpost for the future direction of the Australian retail sector. “The action is in the high net worth (HNW) and ultra high net worth (UHNW) sectors; they are the bellwether for trends to come and where the areas of potential opportunity are first identified.”

She cites overseas research which found 20 per cent of HNW and 21 per cent of UHNW investors in Europe and the Middle East are directing money into clean technology investments. “Among HNW investors, 25 per cent are directing over 10 per cent of their investments into responsible investments,” O’Halloran says.

Research by the European Sustainable Investment Forum (Eurosif) highlights the level of retail interest. Its 2010 High Net Worth Individuals and Sustainable Investment Study found this investor group’s responsible investments have increased since the beginning of the financial crisis, even though their overall wealth slightly contracted over the same period.

Eurosif estimates the European HNW sustainable investment market was worth approximately $729 billion as at 31 December 2009, and based on current trends, it will account for 15 per cent of European HNW investor portfolios by 2013 (or just below $1.2 trillion). 

Interestingly, Eurosif found 94 per cent of wealth managers and 75 per cent of HNW investors thought the financial crisis has had a positive impact on the performance of their sustainable investments. The study found the majority of HNW investors consider financial opportunity to be the main driver for sustainable investment demand.

Just sensible investing

While responsible investment is yet to make similar inroads in the Australian market, the idea of identifying ESG risk as part of the investment process is becoming increasingly popular with retail investors.

RIAA’s 2010 Benchmark Report shows consumer demand for responsible investment products rose 50 per cent in 2009/10, with ethical advisor portfolios rising to $1.46 billion from $972 million in the previous financial year.

In the wake of the global financial crisis (GFC), retail investors believe the idea of identifying and avoiding risky companies makes perfect sense, according to Ord Minnett senior financial planner, Mark Tindale, who is certified under RIAA’s Responsible Investment Certification Program.

“They are looking for well run, sensible businesses and want to avoid the extremes out there,” he says.

“The demographics of responsible investment clients have not changed that much, as clients want to invest in companies that don’t do dodgy things or are doing sensible things,” Tindale notes.

For Tindale, responsible investment is not about ‘tree hugging’, but rather, hugging your assets. “I feel more confident doing responsible investment as it is sensible investing.”

He believes many of the risks considered as part of responsible investment help to screen out the problem companies and investments for small investors.

“Responsible investment is about good investing. If you are not comfortable that senior management will take care of shareholders, then you shouldn’t be in that company at all,” Tindale says.

In his view, this is not a fringe approach but is now mainstream investment practice. “A number of the large brokers now have big teams investigating ESG issues before they make share recommendations. Institutional investor demand has led to the quality of research in this area improving enormously.”

According to Berrutti, the responsible investment approach also reduces client nerves due to sharemarket volatility and means funds under management tend to be ‘stickier’. “Investors in these funds are committed to those principles and tend to be less skittish.”

Tindale agrees market volatility tends not to deter those committed to the idea of responsible investment.

“Most good financial planners focus on clients investing for the medium-term of three to seven years. If clients invest in line with that timeframe, then they are willing to ride out the bumps,” he says.

Clients investing in ethical funds tend to be even stickier, as they are investing in line with their values. 

According to Vernon, ethical funds are “distinctly different” to mainstream investment funds and this is catching the attention of many advisers. “Some financial planners recognise the difference and increasing numbers are interested in it.”

Going back to school

This interest is translating into a desire to learn more about the area and the differences between ESG and ethical investing, Vernon says. “Financial planners need to understand and get educated on it.”

Tindale believes advisers have varying levels of knowledge when it comes to responsible investment, and admits it is not for every planner.

“Adviser knowledge is mixed, but it is not for everyone – you should believe in it to do it,” he says. “You need to understand it properly. If you are going to do it, do it well.”

RIAA’s RI Academy offers educational courses ranging from basic through to specialised course for advisers. In November, its new retail market course, RI for Wealth Managers, will be launched. 

The course has been adapted from its successful online RI for Financial Advisers course, which has been running since 2006. It will provide RI Academy Certification, and will cover subjects including the rationale for advising clients about responsible investment, creating a responsible investment profile, product selection, ESG analysis for direct shares, and adding value to advice.

Tindale believes RIAA training and certification are important for advisers interested in the area. 

Those working in the area believe there are clear advantages for advisers who decide to upskill. 

“There are benefits for financial planners, as increasing awareness by clients will result in increasing interest,” Vernon notes.

“Financial planners are going to get increasing questions from clients, so from a business perspective they need to understand the area and be prepared. Clients who are interested are not going to be impressed if you are not able to answer.”

Berrutti agrees this is an area advisers should be equipped to discuss with clients. “One benefit is you get to know your clients better, and understanding their wants and needs better.”

Stronger client relationships are also combined with real business benefits, he notes. “It is also good for the planner, as this money is much stickier.”

At the very least, advisers should be asking their clients about their interest in the area, O’Halloran argues. “Clients like to be asked if they have an ethical or sustainable preference that needs to be taken into account.”