Ethics paying off

Investment portfolios which incorporate companies that successfully manage environmental, social and corporate governance issues considerably outperformed more traditional portfolios in the year ended June 2007, according to a new report by the Responsible Investment Association of Australasia (RIAA).

According to the report, Responsible Investment 2007, all sectors of the responsible investment sector experience rapid growth in the past financial year. Funds under management were up 43 per cent to $17 billion, compared with the total managed investment sector, which Morningstar research revealed had grown 20 per cent.

In a statement to the media, the RIAA (formerly the Ethical Investment Association) said this was the third year running that responsible investment portfolios had outperformed their mainstream counterparts in terms of share market returns, inflows from investors and growth in superannuation assets.

The report also confirmed that mainstream institutional investors were increasingly incorporating environmental, social and corporate governance (ESG) issues into their stock selection, financial analysis and engagement with companies they are invested in. According to the RIAA, total funds using this practise amounted to $52.8 billion.

RIAA executive director Louise O’Halloran said the responsible investment sector’s “outstanding” performance reflected the growing importance the government, business community and general public placed on ESG issues. From an investment perspective, she said responsible investing was “about reducing risk, increasing returns, meeting the expectations of society and/or expressing personal values”.

“The truly transformational growth in recent years has come from institutional investors, particularly those in the superannuation sector. Analysis of ESG issues helps them fulfil their fiduciary duty as long-term investors, because it’s over the long-term that these issues really start to impact portfolio value.”

Responsible investment portfolios across the ditch also experienced a boom in the 2006-07 financial year. According to the report, a surge of new investments in the New Zealand Superannuation Fund and the ASB Community Trust’s adoption of a responsible investment policy helped drive the sector’s total investment assets from NZ$37.2 million to NZ$15 billion.