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Key takeouts
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Responsible investing is growing strongly |
Responsible investing doesn’t mean sacrificing financial performance |
ETHI and FAIR offer ‘true to label’ exposure that has outperformed |
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Globally, funds invested in responsible investments increased by 34% from 2016-2018 |
Responsible investment funds have outperformed some of the broad sharemarket indices both in Australia and overseas over the 10-year period to 31 December 2018 |
ETHI and FAIR employ some of the most stringent ESG screens in the industry, and have done so without necessarily sacrificing returns |
In April 2019, the Global Sustainable Investment Alliance (GSIA) released its 2018 sustainable investment review, the fourth in its biennial series. The report found that sustainable investing assets in Europe, the US, Japan, Canada, and Australia and New Zealand were US$30.7 trillion at the beginning of 2018, a 34% increase since the previous review in 2016.
In terms of the value of sustainable investing assets, Europe leads the way, followed by the US.
Figure 1: Global sustainable investing assets, 2016–2018 (USD)
Note: Asset values are expressed in billions of U.S. dollars. All 2016 assets are converted to U.S. dollars at the exchange rates as of year-end 2015. All assets are converted to U.S. dollars at the exchange rates at the time of reporting.
Source: 2018 Global Sustainable Investment Review, Global Sustainable Investment Alliance
Growth rates vary widely across regions. With the most mature sustainable investment environment, Europe’s growth is perhaps predictably slowing. Growth across the US, Canada and Australasia was strong, while the standout was Japan.
Figure 2: Growth of sustainable investing assets by region in local currency, 2014–2018
Note: Asset values are expressed in billions. All 2018 assets are as of 31 December 2017, except for Japan, whose assets are as of 31 March 2018.
Source: 2018 Global Sustainable Investment Review, Global Sustainable Investment Alliance
The proportion of total managed assets accounted for by sustainable investing assets is on the rise in almost every region. In Canada and Australia/New Zealand, when using a broad definition of the term, sustainable investing assets now account for more than half of all assets under professional management.
The only region showing a fall was Europe, a decline probably due at least partly to a shift to stricter standards and definitions for sustainable investing.
Figure 3: Proportion of sustainable investing relative to total managed assets, by region, 2014-18
Note: In 2014, data for Japan was combined with the rest of Asia, so this information is not available.
Source: 2018 Global Sustainable Investment Review, Global Sustainable Investment Alliance
The GSIA figures are as of 31 December 2017, and combine Australia and New Zealand.
The Responsible Investment Association Australasia (RIAA) 2019 Responsible Investment Benchmark Report found that responsible investment assets under management in Australia grew by 13% in 2018 to be $980 billion as at 31 December 2018, representing 44% of total professionally managed assets under management in Australia.
Future growth
The growth appears likely to continue.
A 2019 study by Greenwich Associates1 looked at the intended allocations of US and European institutions to assets to be managed according to ESG criteria over the next five years. Almost half the European respondents thought they would allocate more than 50%, compared to 11% of the US institutions.
Figure 4: Percentage of assets expected to be managed according to ESG criteria in next five years
Note: Based on 163 respondents in the U.S. and 113 in Europe.
Source: Greenwich Associates 2018 U.S. and European Exchange-Traded Funds Studies
Having said that, US institutions are increasingly taking ESG factors into account in their investment decisions. In 2018, around a quarter of US institutions in Greenwich’s survey reported that they had either sold out of, or bought into, investment strategies as a result of ESG considerations – still considerably less than their European counterparts, but up almost 10% from the previous year.
Figure 5: Has the ESG approach led to changes in investment process/products?
Note: 1Based on 173 respondents in 2018 and 117 in 2017. 2Based on 1119 respondents in 2018 and 118 in 2017.
Source: Greenwich Associates 2018 U.S. and European Exchange-Traded Funds Studies
Around 74% of the responsible investments in the US was managed on behalf of institutional investors, and 26% on behalf of individual investors2.
Is there a trade-off with financial performance?
It’s probably no coincidence that the increasing incorporation of ESG considerations into institutional investing coincides with growing confidence that strategies based on ESG have the potential to improve financial returns.
In 2017, only 8% of US participants in Greenwich’s survey agreed that ESG overlays/investments increased the likelihood of strong investment returns over the long term. A year later, that had risen to 22%3. Greenwich found that nearly half of Canadian asset managers believe that ESG overlays/ investments will enhance the likelihood of strong investment returns over the long term4.
There may be sound reasons for this increase in confidence.
The RIAA found that, as at 31 December 2018:
- International responsible investment share funds outperformed the Morningstar average mainstream international share fund over 1, 3, 5 and 10-year periods.
- Australian responsible investment share funds outperformed mainstream Australian share fund benchmarks over 1, 5 and 10-year periods (but not for the 3-year term).
- Responsible investment multi-sector funds outperformed the mainstream multi-sector growth fund average over 1, 3, 5 and 10-year periods.
| AUSTRALIAN SHARE FUNDS | 1 YEAR | 3 YEARS | 5 YEARS | 10 YEARS |
| Average responsible investment fund (between 17 and 34 funds sampled depending on time period) | -1.24% | 5.70% | 6.43% | 12.39% |
| Morningstar: Australia Fund Equity Large Blend | -5.49% | 4.87% | 4.42% | 7.95% |
| S&P/ASX 300 Total Return | -3.06% | 6.65% | 5.60% | 8.91% |
| INTERNATIONAL SHARE FUNDS | 1 YEAR | 3 YEARS | 5 YEARS | 10 YEARS |
| Average responsible investment fund (between 7 and 38 funds sampled depending on time period) |
-0.03% | 11.18% | 9.48% | 9.50% |
| Morningstar: Equity World Large Blend | -0.68% | 6.37% | 8.42% | 8.97% |
| MSCI World Ex Australia NR AUD | 1.52% | 7.49% | 9.81% | 9.57% |
| MULTI-SECTOR GROWTH FUNDS | 1 YEAR | 3 YEARS | 5 YEARS | 10 YEARS |
| Average responsible investment fund (7 funds) | -1.13% | 4.75% | 5.65% | 7.66% |
| Australia Fund Multi-sector Growth | -2.26% | 4.39% | 4.92% | 7.02% |
Outperformed by the average RI fund Underperformed by the average RI fund
Source: Responsible Investment Benchmark Report 2019 Australia (RIAA). Past performance is not indicative of future performance.
A study released in November 2018, How ESG Investing Has Impacted the Asset Pricing in the Equity Market5, adds weight to these figures.
The researchers looked at the performance of stocks that were ranked on their ESG score (as given by four providers, and validated by ESG analysts) between 2010 and 2017. While they found no evidence of a consistent reward of ESG integration in stock prices between 2010 and 2013, they found that between 2014 and 2017, buying the top quintile of stocks (as ranked by ESG score) and selling the bottom-rated quintile would have produced significant outperformance compared to a market cap-weighted approach. An excess return of 3.3% p.a. would have resulted in the US, and an excess of 6.6% p.a. in Europe.
True-to-label exposure
Interpretations of ‘responsible/ethical investing’ can vary widely, and there are a number of regulatory initiatives underway to try and introduce a more standardised approach. The EU, for example, has developed a taxonomy, or classification system, which aims to define what constitutes a ‘green’ investment and to stop companies trying to make investments sound more sustainable than they really are (‘greenwashing’).
At the moment, a number of indices that are used as responsible investment benchmarks include companies whose ethical credentials are questionable – for example because they are involved in fracking activities, or are linked to cosmetic animal testing and the fur trade, or run prisons and detention centres for asylum seekers.
As another example, some ‘ethical’ funds avoid investing in ‘pure play coal companies’, however, they may still hold major coal producers such as BHP and Anglo American, on the grounds that they are ‘general mining’ companies rather than ‘coal miners’.
Some investors may be comfortable with this, but for others such exposure may be inconsistent with their principles.
BetaShares responsible investment ETFsBetaShares currently offers two responsible investment share ETFs:
Both funds have been certified by the RIAA as ‘Certified Ethical Investments’6. The funds employ some of the most stringent ESG screens in the industry, and exclude companies with significant exposure to the fossil fuel industry, as well as those engaged in activities/products deemed inconsistent with responsible investment considerations, including gambling, tobacco, armaments, uranium/nuclear energy, destruction of valuable environments, animal cruelty, mandatory detention of asylum seekers, alcohol, and pornography. Both funds also include gender diversity screens. |
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The screening processes and ‘true-to-label’ exposure limits for both funds can be found here.
Unlike many passively managed responsible funds, BetaShares engages actively with companies on ethical issues. We vote in a way that aligns with the ESG criteria for the index the fund aims to track7.
Performance of BetaShares responsible investment ETFs
In their relatively short existence, the funds have attracted strong investor interest. As of 13 November 2019, FAIR had ~$380 million in funds under management, while ETHI had ~$420 million8, currently making them the largest ethical ETFs on the ASX.
In the three years to November 2019, the market cap of ASX-traded ethical ETFs increased around 270% from $366 million to over $1.3 billion, with ETHI and FAIR capturing over 70% of this increase.
Both funds have significantly outperformed their respective broad sharemarket indices since inception in 2017, while the indices the funds aim to track have outperformed over a longer timeframe (noting past performance is not necessarily indicative of future performance).
Over the last five years:
- the index ETHI aims to track has outperformed the MSCI World Index (AUD) by ~3.5% p.a.
- the index FAIR aims to track has outperformed the S&P/ASX 200 Index by ~ 4.5% p.a.
Performance of ETHI’s index against global benchmarks to 31 October 2019
| ETHI’s Index | MSCI World Index (AUD) | S&P Global 100 Index (AUD) | |
| 1 year | 23.37% | 15.96% | 16.46% |
| 3 years (p.a.) | 19.98% | 15.60% | 17.44% |
| 5 years (p.a.) | 16.70% | 12.96% | 13.61% |
Performance of FAIR’s index against S&P/ASX 200 index to 31 October 2019
| FAIR’s Index | S&P/ASX 200 Index | |
| 1 Year | 22.74% | 19.28% |
| 3 Years (p.a.) | 14.82% | 12.56% |
| 5 Years (p.a.) | 13.00% | 8.47% |
Source: Bloomberg. The index that ETHI aims to track is the Nasdaq Future Global Sustainability Leaders Index. The inception date of the index is 29 April 2011. The index that FAIR aims to track is the Nasdaq Future Australian Sustainability Leaders Index. The inception date of the index is 17 November 2017. This table includes backtest data. You cannot invest directly in an index. Past performance is not an indication of future performance of the index or the ETF. Performance does not take into account ETF fees and costs.
For more information on the two funds, go to ETHI and FAIR. BetaShares have just launched a responsible investment diversified fixed income product, the BetaShares Sustainability Leaders Diversified Bond ETF – Currency Hedged (ASX: GBND) to accompany our market-leading equities solutions. For more information on this new exposure, contact info@betashares.com.au or 02 9290 6888.
There are risks associated with investing in the funds, including market risk, non-traditional index methodology risk and, in the case of ETHI, international investment risk and foreign exchange risk. For more information on the risks and other features of the funds, please refer to the relevant Product Disclosure Statement (PDS). The value of an investment and income distributions can go down as well as up. Before making an investment decision, investors should consider the relevant PDS and their particular circumstances, including their tolerance for risk, and obtain financial advice.
1. Greenwich Associates, U.S. Institutions’ New Tool of Choice for Portfolio Construction, 2019
2. Global Sustainable Investment Alliance, 2018 Global Sustainable Investment Review
3. Greenwich Associates, U.S. Institutions’ New Tool of Choice for Portfolio Construction, 2019
4. Greenwich Associates, Canadian Institutions Lead the Way in ETF Investing, 2018
5. Leila Bennani, Theo Le Guenedal, Frederic Lepetit, Lai Ly, Vincent Mortier, Thierry Roncalli & Takaya Sekine, How ESG Investing Has Impacted the Asset Pricing in the Equity Market, Amundi Asset Management, Paris, November 2018
6. The Responsible Investment Certification Program does not constitute financial product advice. RIAA does not recommend to any person that any financial product is a suitable investment or that returns are guaranteed. Appropriate professional advice should be sought prior to making an investment decision. RIAA does not hold an Australian Financial Services Licence. www.responsibleinvestment.org.
7. Our proxy voting record on ESG resolutions for the companies held by ETHI and FAIR can be found under the ‘Proxy Voting’ heading on our Regulatory Resources page.
8. Source: BetaShares
