Article written by Joanna Mather. Published in The Australian Financial Review August 13, 2024.
Poor performance, greenwashing scandals and political backlash in the US appear to have dented ESG fervour among investors globally.
There was a piercing local blow when Mercer Super was forced to apologise for falsely claiming its “Sustainable Plus” options excluded investments in companies involved in the production or sale of alcohol, gambling and fossil fuels.
Mercer was fined $11.3 million in the action brought by the Australian Securities and Investments Commission (ASIC).
Dan Powell says investors are wary of marketing hype and determined to “look under the hood”.
“Unfortunately, a lot of funds promoted as green or sustainable have not delivered good investment outcomes recently and many high net worth investors remain understandably concerned about the ability to combine doing good with good returns,” he says.
Financial planners and chief investment officers at wealth management businesses heavily aligned to ESG principles insist the setbacks are temporary.
“ESG is a contentious topic,” says financial adviser Justin Medcalf.
“Some downplay climate risk and view ESG as an economic hindrance, while others criticise ESG ratings for obscuring true environmental and social impacts.”
“Things have moved further and faster than we ever hoped possible. And while there has been some pushback in recent times against greenwashing, we see that as a very healthy sign of maturity in the sector, and a winnowing out of those who are trying to cash in on a trend from those who are genuinely committed to good outcomes.”
Norman Zhang says decarbonising a portfolio is a two-stage process: “The first stage is to ensure your portfolio at the very least does no harm.
“Typically, the way you implement that is through a traditional form of screening by excluding certain companies.”
The second element is a bit trickier and involves actively investing for impact, Zhang says.
“You’re looking for investments that achieve the investor’s impact goals as well as provide a reasonable return. The most customised element of a portfolio these days is how you do the impact.”
The best opportunities to create impact are in unlisted assets, Zhang says. Being selective is key, and sometimes that means sitting on the sidelines until the right projects become available.
Zhang notes investor disappointment about poor financial returns on renewables in Australia.
“This is largely because wind and solar assets were built on the promise of strong contracted returns, but the results were contingent on the assets being connected to the grid, and the grid wasn’t ready.”
The risk is that this might stifle private investment in the next wave of energy infrastructure projects, Zhang says.
LGT Crestone Wealth Management Deputy Chief Investment Officer Kevin Wan Lum says the most common strategy is for investors to choose assets that emit less carbon or aim to lower emissions.
“This can be done across most asset classes without having to sacrifice returns and in many cases still achieving very good risk-adjusted returns,” he says.
In real assets, this can include investing in property with high green star ratings. Within infrastructure, there are options to participate in projects focused on renewable energy, electrification, and waste management and recycling.
Wan Lum likes the IFM Net Zero Infrastructure Fund, which last year acquired GreenGasUSA, a renewable natural gas developer, owner and operator, and Wellington Global Impact Bond Fund, which seeks to reduce inequality and mitigate the effects of climate change.
And in private equity and venture capital, clients can invest in technology companies trying to build solutions, as well as those pursuing green steel manufacturing and renewable hydrogen, for example. An important but often overlooked option is investing in timberland, Wan Lum says.
LGT Crestone has also launched the Princely Strategy – Next Gen, which integrates ESG through the entire investment process across all asset classes, along with measuring carbon intensity. Then to reduce total portfolio emissions to as close to zero as practical, the company buys carbon credits and retires them on a quarterly basis.
“Currently the cost of purchasing carbon credits per year is approximately equal to 0.1 per cent to 0.12 per cent, so a relatively small cost to offset carbon emissions of your portfolio,” Wan Lum says.
He adds that, while much attention is paid to investment in future technologies, there are existing solutions for reducing emissions, such as energy-efficient lighting and stop-start ignitions in cars.
Nowhere is ESG more polarising than in the US, where some banks and money managers have scaled back reference to the three letters.
Some wealth managers even seek to capitalise on “anti-woke” sentiment.
A small-time Ohio-based financial services company called Strive Asset Management, founded by former Republican presidential candidate Vivek Ramaswamy, this year launched a 401(k) retirement plan promising an uncompromising focus on profits over ESG principles.
Then in July it announced plans for a wealth management offering for Americans “hungry for an authentic and unapologetic embrace of capitalism”.
ESG proponents reject the claim that financial returns are compromised.
Zhang says the vast majority of clients are unwilling to take concessionary returns, and that means working hard to find the right assets.
“Most wealthy people have a philanthropic endeavour and they’d rather donate through their foundation than take concessionary returns from an investment portfolio,” he says.
Medcalf says the landscape is constantly changing: “Ethical investing often sounds holier than thou, so the language has shifted to focus on the impact investments make, both environmentally and socially, positive and negative.
“Impact investment focuses on measurable outcomes. It involves intentionality, measurement and additionality. Investments must identify positive impacts, measure and report them alongside financial returns, and mobilise additional capital to achieve those goals.”
Nanuk’s focus is on listed global shares and industries that contribute to a more sustainable world, Powell says.
Achieving impact is hard, he says: “A lot of investors would prefer to avoid investing in ethically contentious or environmentally damaging activities, and many are now actively seeking to make direct investments in companies that are helping solve environmental or social issues.
“But there are limited opportunities that are likely to deliver both good investment outcomes and strong alignment with a better world, and less again that will deliver real impact.”
