Lonsec annual socially responsible investment (SRI) sector review has identified a shift away from traditional ‘ethical’ and SRI approaches, and the researcher has developed a ‘green roadmap’ for advisers to cope with the challenges the sector presents.
The review awarded ‘highly recommended’ ratings to two Australian equity funds, the BT Wholesale Ethical Share Fund and the ING Wholesale Sustainable Investment Australian Shares Trust.
“The most notable development in SRI since Lonsec’s 2008 sector review has been the continued shift away from traditional ethical and SRI approaches towards the concept of ESG [environmental, social and governance] and sustainable investment,” said Lonsec’s senior investment analyst, Steve Sweeney.
“At a simplistic level, the sector has become less overtly focused on avoiding ‘bad’ companies to investing in sustainable companies regardless of activity.”
Lonsec has developed a ‘green roadmap’ for financial advisers to help them face the challenges of providing financial advice in the sector and differentiate between diverse approaches to SRI investing.
“Its goal is to help advisers make an assessment of where responsible investment funds sit along the continuum of ethical, socially responsible and ESG factors,” Sweeney said.
“The depth of SRI factors result in a light green, mid green or dark green ranking, plus we identify whether the key investment focus is on ethical, socially responsible or ESG factors.”
Lonsec stated that differing approaches can have a substantial impact on the portfolio, for example fund managers with an ‘ethical’ approach may avoid stocks from certain companies altogether, while those with an ESG approach might rate a company highly for the way it identifies and manages certain risks.
Lonsec has identified a trend in the last 12 months in that the broader investment community has seen the merit in adopting an ESG assessment in their equity research processes as an additional measure for gauging risk and earnings resilience.
