“Today, we’re really seeing more of the fund managers trying to proactively seek out more positive, more sustainable companies and actually contribute to investing and capitalising in more sustainable assets and businesses.”
O’Connor says the finance sector is doing a lot of work on how it can better align investments with the 2016 Paris Agreement on Climate Change and its target of keeping the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels, and with the United Nations’ Sustainable Development Goals.
The sector is growing rapidly. RIAA’s 2018 Responsible Investment Benchmark Report found that funds under management by “Core” responsible investment Australian share funds – generally those classified as ethical investors – grew from $64.9 billion in 2016 to $186.7 billion in 2017.
Australian Ethical has an Ethical Charter which contains 11 principles about the impacts or activities which cause it to rule out an investment in a company, as well as 12 principles outlining the positive impacts and activities it seeks from its investments.
For instance, it seeks out investments which provide for and support for the development of workers’ participation in the ownership and control of their work organisations and places, the development of sustainable land use and food production, and the development and preservation of appropriate human buildings and landscape.
Healthier investing for the future
Australian Ethical has an investment in Fisher & Paykel Healthcare, the New Zealand-based manufacturer of products for respiratory care, acute care, and the treatment of obstructive sleep apnoea, with the final product in particular making it a positive investment.
“Sleep apnoea can, if severe and untreated, lead to premature death, and increases the risk of heart attack, stroke, diabetes and depression. It also contributes to motor vehicle and workplace accidents and fatalities,” Palmer says.
Childcare provider G8 Education is also a positive investment.
“Childcare and childhood education are positive under our Ethical Charter for their direct benefits to children and for helping parents manage care and education responsibilities alongside career and other responsibilities and interests,” Palmer says.
Banking on change
Australian Ethical also holds investments in two of the big four banks, Westpac and the National Australia Bank.
While this might seem surprising in light of the findings of the royal commission into the banking sector, Palmer explains: “We do see a responsible, well-functioning financial service sector as a really powerful force for positive change. In the context of climate change, it is the big banks who are allocating capital to renewables and to the sorts of new infrastructure we’re going to need to accelerate investment in,” he says.
When the fund looks at banks, it also considers their record on compliance with regulations and how much they are paying to customers for remediation when something goes wrong, which has become increasingly important in the wake of the royal commission.
“That allows us to try and put some of those things in context of really large organisations where inevitably there is going to be stuff going wrong, so the challenge is working out: Is that a systemic issue? How serious is this in the context of the overall impact that that company has?” Palmer says.
Australian Ethical will also be closely watching how the banks go about implementing the recommendations of the royal commission.
Palmer says there are two key elements to considering an ethical investment. Firstly, what are the products and services the company is producing? And secondly, how is the company producing, marketing and selling these products?
“You could have good products and services, but you could be operating in a very unethical way –exploiting and discriminating against employees or trashing the environment in the way that you’re actually producing the positive product,” he says.