Article written by LGT Crestone Head of Sustainable Investment, Amanda MacDonald. Published in The Australian August 25, 2023.
There is no doubt that the global challenges we have faced over recent years, from a pandemic, extreme weather events, to an energy crisis, have re-emphasised to us all the importance of a healthy, functioning and sustainable planet.
Australia’s high net-worth individuals (HNWIs) are continuing to drive capital towards sustainable investments with 46 per cent of respondents to a survey seeking to have a positive impact alongside a financial return, and 47 per cent wanting alignment with their personal values.
However, in current market conditions, there is less willingness to sacrifice returns in favour of sustainable outcomes. The good news is that there is recent research linking improved financial outcomes to various sustainable investing approaches.
Once a niche market, the sustainable investment landscape continues to mature, creating better frameworks and standards to ensure best practice and performance, and as the market continues to evolve, sustainable investments can therefore pay real dividends to investors, and have a positive impact.
LGT Crestone’s recent annual 2023 State of Wealth report draws upon research by CoreData which is the most extensive of its kind in Australia. Despite the potential for improved performance, some investors are avoiding sustainable investments for fear that it could come at the cost of returns.
The report reveals that consideration of social factors when investing has declined, with the number of investors actively seeking sustainable investments and willing to pay more or sacrifice returns falling to 6 per cent this year from 16 per cent in 2021. For 24 per cent of HNWIs, social factors are not entering their investment decisions and 28 per cent report viewing these types of investments as “nice to have, but they are “not willing to pay more or sacrifice returns”.
The report reveals that compromised investment returns are of particular concern for investors aged 60 years and above, with 38 per cent of this age cohort not considering social factors in their investment decision making. In contrast, investors aged 29 years and below are the largest age cohort to be actively seeking sustainable investments and are willing to pay more or sacrifice returns.
Despite perceived extra risk, returns from sustainable investments are perceived as similar to other types of investments, with 46 per cent agreeing returns are as good as other investments and only 18 per cent believing they are worse. Interestingly, 22 per cent were not sure, indicating a strong education opportunity for professional wealth advisers.
Considering the perceptions of risk and returns of investors not currently investing in sustainable investments, 23 per cent of HNWIs said they want to include them in their portfolio. However, the majority (38 per cent) of this cohort said they would consider sustainable investments only if they offered “market-like” returns, demonstrating the importance of returns as a primary driver of choice for sustainable investments.
A key message for investors is that sustainable investing can in fact boost returns.
Dr Philipp Krueger, a professor of responsible finance at the University of Geneva, has long studied the relation between responsible investing characteristics and investment performance.
Krueger says in a 2020 study he co-authored that high sustainability footprint investors enjoy a higher risk-adjusted performance, largely through risk reduction.
That is backed up by other academic papers which find that investors can raise their portfolio’s sustainability exposure and increase risk-adjusted performance at the same time, overcoming the notion of sustainable integration being a burden to traditional investment strategies.
The top three reasons for investors’ interest in sustainable investments is their alignment with personal values (47 per cent), a desire to have a positive social impact (46 per cent) and the potential for higher growth (33 per cent). Furthermore, investors’ top reasons for interest in sustainable investments align with the desire to combat climate change. Importantly, 50 per cent of HNWIs consider that climate change is an investment risk to some extent, acknowledging the role of private capital in combating this global issue.
To achieve their desired financial and impact objectives, the main areas of interest for HNWIs when having positive impact is through climate action (32 per cent), followed by societal wellbeing and healthcare (24 per cent) and financial inclusion and empowerment (18 per cent).
Women too are seeking to address gender imbalance and inclusion through sustainable investing.
With the energy transition firmly upon us, we expect demand for sustainable investing to rise in coming years.
