Mon, Apr 03, 2017 page16

• Ethical investment tide lifts ‘greenwash’ concerns

  • REUTERS, SYDNEY
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  Investors are plowing ever more into ethical funds to back their views on issues such as global warming and gender equality, but such investments can be confusingly similar to standard funds, except for higher fees and ‘green halo’ marketing.

  The US$23 trillion “sustainable, responsible and impact” (SRI) investment sector has received a rush of money since the Paris climate agreement and in protest against US President Donald Trump’s plans to slash environmental regulations.

  Europe is the dominant region for such investments with US$12.04 trillion, followed by the US with US$8.72 trillion.

  US investors have poured US$1.8 billion into actively managed US equity funds in the socially responsible category from November last year to January, according to Lipper data, while other funds saw a net outflow of US$133 billion.

  Even in fossil-fuel-rich Australia and New Zealand, SRI investment rose from US$148 billion to US$516 billion between 2014 and last year, according to the Global Sustainable Investment Review released on Monday last week.

  Sydney-based Altius Asset Management Pty Ltd portfolio manager Gavin Goodhand said the company’s sustainable bond fund tripled shortly after the 2015 climate accord, where nearly 200 nations signed on to measures designed to curb greenhouse gas emissions.

  “The Paris conference was the line in the sand for many of our retail customers, particularly the millennial generation, who want to do the right thing for the environment,” Goodhand said.

  Governments are also tapping the trend, selling green bonds to fund projects such as wind farms or low-carbon transport, with Poland, France and Nigeria making their debuts this year.

  However, some managers are skeptical.

  “While environmental, social and governance factors should always factor into investment decisions, this is largely a marketing exercise,” said Steve Goldman, a global portfolio manager at Sydney-based Kapstream Capital Pty Ltd.

  The bond market does not have commonly agreed standards or criteria for what constitutes a green bond, and there is no guarantee the proceeds actually go to the low-carbon project as claimed.

  There are similar concerns over equity products.

  Australian Ethical Investment Ltd head of ethics research Stuart Palmer said there was a danger that some marketing departments would “greenwash” their products to lure investors into funds that were little different from standard products.

  There are no agreed definitions on what is considered ethical, sustainable and socially responsible, but ethical investors are typically expected to pay higher fees.

  For example, retail investors pay more than a third higher fees for the sustainability and ethical funds at Sydney-based BT Investment Management Ltd than for its standard share fund equivalent.

  The three funds hold six or seven of their top-weighted stocks in common, including major banks Australia & New Zealand Banking Group Ltd, Westpac Banking Corp, National Australia Bank Ltd and miner BHP Billiton Ltd, according to filings from December last year.

  For investors, it can be a minefield.

  “I find it difficult as a consumer to do the due diligence I would like to do, because even the ethical funds are not always totally transparent about what they define as ethical,” retail investor and Sydney academic Meraiah Foley said.

  “One of the ethical funds I have invests very heavily in retail banks in Australia, and those banks themselves may be underwriting projects that the fund itself would not invest in,” Foley added.

  Individual stock picks can prove controversial.

  Australian fund manager Perennial Investment Partners Ltd had a long position in the building company James Hardie Industries NV in its socially responsive trust before the fund was sold in 2015, despite huge liabilities stemming from Hardie’s history of manufacturing asbestos products.

  An early Australian adopter of SRI principles, Local Government Super (LGS), holds a position in retailer Woolworths Ltd, the nation’s biggest slot machine operator, which would put it beyond the pale for investors who avoid stocks that profit from gambling.

  LGS head of sustainability Bill Hartnett said Woolworths met the manager’s SRI guidelines.

  There is also no standard practice on what to do when an existing fund stock breaches a manager’s policies. Some investment managers will sell, but others argue they can influence behavior by retaining their shareholding.

  “We believe in engagement rather than divestment,” said Sam Sicilia, chief financial officer at the pension fund Hostplus. “When you sell a share in a ‘bad’ company, it’s a transfer of ownership and does nothing to the company that’s causing the issue, so divestment does not really work.”
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