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As energy transition gains urgency, ethical investing sees its moment
Ethical investing is often perceived to require a trade-off, with investors needing to give up some returns for their desire to have a positive impact on the planet. But by properly managing risk and focussing on the materials and companies that will be most needed next, investors in the clean-energy transition can have it both ways, according to Australian Ethical.
With the World Economic Forum now calling climate change the number-one risk facing the global financial system, Australian Ethical head of client relationships Leah Willis (pictured, left) said, “there is complete relevance” in talking about climate and its impacts on investments now and “well into the next couple of decades” when discussing growth and portfolio construction.
Willis was speaking at The Inside Network’s recent Growth Symposium, where she interviewed her colleagues – ethics analyst Persephone Fraser (pictured, centre) and deputy chief investment officer John Woods (pictured, right) – in a thought leadership panel on climate change, decarbonisation and ethical investing. While climate change represents great risk for countries, companies and investors, they said, it equally offers opportunities that can bring both financial and environmental benefits.
And Australian investors in particular have plenty of reason for optimism, Fraser said.
“We have a lot to gain from having a clear path for the transition in Australia and from having honest conversations about the industries that will need to wind down and those that have a lot of hard work to do to transition,” she said. “And we should be optimistic that we’re in a great position to take advantage of so much new industry.”
Woods was keen to dispel the perception that ethical investing necessitates lower returns, saying he hasn’t needed to give anything up to manage a balanced portfolio with ethical impact.
“I need to be more deliberate in my investment decisions, and I need to lean on an ethical research team to help construct the portfolio,” he said. “It is more work in building those portfolios, but in terms of managing risk and return with a long-term perspective, I believe you can construct a fully diversified portfolio to meet your objectives.”
‘Missing a trick’
Exclusions and divestment, both generally associated with ethical investing, are “a big part of the job,” Fraser acknowledged, though she noted the importance of “how we define our investable universe” and of the ability to engage.
“You’re sort of missing a trick if you’re divesting and not engaging with companies and asking them how they can do better or, alternatively, if you engage with companies but have no opportunity to escalate those concerns. It’s hand in hand.”
For instance, while “it’s not a flat-out no for fossil fuels, it’s a no to fossil fuel companies,” Fraser said, noting that this rules out most resources and energy companies in Australia. “But I think that puts us in a good position to be really focussed toward new industries. It also gears us toward being front-footed in terms of new technology and paying attention to what the next thing will be.”
The focus on new technology makes science and data particularly important to identifying “what we don’t have enough of right now to actually implement the projects we need to transition our economy,” according to Fraser.
The importance of supply and demand in this space also means not managing transition risk will have a significant impact on the future returns of all “major asset classes,” Wood noted.
However, “what’s good about the piece of the cycle we’re in at the moment is that there are companies emerging to deal with the transition,” he said.
“If we’re successful in that transition, they benefit the most. A small part of your portfolio invested in climate solutions or similar assets can have quite a significant impact.”
Ethical investing, with its conceptual ties to environmental, social and governance (ESG) investing, is closely linked with “impact” – ideally, an ethical investor supports companies and projects that have positive environmental impacts, in turn creating positive financial impacts for the investor. And, ultimately, the aim of the clean-energy transition is to reduce humanity’s negative impacts on the planet.
But despite the “vast swathes of impacts” associated with mining, its necessity in obtaining the minerals required for the transition makes it important to engage rather than simply divest, Fraser said.
“Our job is to say, ‘we need lithium, so let’s dig it up – but how are you going to do that? How are you going to look at your emissions? How are you engaging with traditional owners? How are you going to look at the impacts to local biodiversity?’
“The nice thing about looking at new companies and new sectors is that we don’t have to just accept the conditions the old mining companies have basically gotten away with,” she added. “We’re looking at these new lithium companies, which are saying, ‘we can do that – we can have a respectful relationship with the people who are on this land.’ There are lots of opportunities, but it’s important to think about the operational impacts.”
