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November 30, 2010
The State of Sustainable Investment in Australia
    by Robert Kropp speaks with Louise O'Halloran, Executive Director of Responsible Investment Association Australasia, about the growing acceptance of sustainable investment in Australia.

As reported here on November 23rd, Responsible Investment Association Australasia (RIAA) recently issued Responsibl e Investment 2010, the ninth in the organization's series of annual surveys of sustainable investment in Australia and New Zealand.

In the US, the
Social Investment Forum (SIF) has issued its 2010 Trends Report on sustainable investment as well. Both reports conclusively document substantial increases in the consideration of environmental, social, and corporate governance (ESG) issues in investment decision-making. Still, there are enough developments in sustainable investing in Australia that can make a US investor envious.

Louise O'Halloran, Executive Director of RIAA, told, "Australia and New Zealand have the highest per-capita
Principles for Responsible Investment (PRI) signatory base in the world, with 137 signatories. The US has 118."

"Fifty-five percent of all assets under management here have signed on to the PRI," O'Halloran continued. Funds under management or advice of the Australian signatories now total approximately $591 billion, according to RIAA's report.

Asked to characterize the discrepancy in the uptake of sustainable investment between Australia and the US, O'Halloran said, "We all know how much the transition depends upon government leadership, and that government understands that industry will support leadership. The work done in the US by SIF has been fantastic with regards to isolating the issues that require strong policies. I don't think industry support in the US is the same as it is in Australia or Europe."

"If your government's not moving, responsible investment is not moving much either," she continued.

Asked about the highlights of the report, O'Halloran pointed to the finding that "the average responsible investor in Australia is getting better returns for all periods of one, through three, five and seven years in two of the three major investment categories." Both Australian and overseas share funds outperformed the mainstream market, while sustainable balanced funds outperformed conventional balanced funds over five and seven years.

"The type of research used to analyze companies leads to consistent outperformance," O'Halloran said. "The strength of these returns is a reflection of the overall improvement in analysis."

Citing the contributions of Innovest (now part of
MSCI), Trucost, and Bloomberg to improvements in the quality of investment management, O'Halloran said, "The complicity of financial analysts in only measuring what can be counted is breaking down. In the last five years we've seen the emergence of deep analysis around megatrends such as the influence of resource scarcity on industries, regions, and particular companies. There has been a tremendous deepening of the sophistication of the research, and a deeper understanding of materiality."

"Investment analysts use all the forms of financial analysis, but what they now do is bring in a much wider range of information about the risks that companies are exposed to and the opportunities that can be seized," O'Halloran continued.

Addressing how companies are benchmarked according to the quality of their management, O'Halloran said, "If corporate managers don't believe in climate change they're not going to be preparing their business for the significant economic shift that is about to occur, both by protecting against risk and opening their thinking to opportunities."

Furthermore, "Measuring a company's competitive position has always been a measurement of quality," she continued.

"Many people who are starting to doubt the financial model that only requires short-term knowledge and is only interested in quantitative information. Eighty percent of factors that drive a company's value in the 21st Century are intangibles," O'Halloran said. "If your model can only count what can be counted, then your model is wrong. You're not going to change the fact that much of a company's value is determined by the quality of staff and management and the quality of its relationships."

Turning to the growing influence of the significant percentage of institutional investors in Australia who now embrace ESG considerations, O'Halloran said, "We've also seen a greater participation by long-term investors in the efforts to stretch the time horizon thinking. That's very important because ESG issues don't have an impact around the three-month mark, or around one year. But if you start to look out to three and five years, you'll find that almost all the issues will have implications."

To many US-based readers of the reports by RIAA and SIF, the most striking difference in the practice of sustainable investment between the US and Australia is in the area of shareowner activism. Describing Australia as a "benign environment for shareholder activism," RIAA's report found that no shareowner resolutions relating to environmental or social issues have been submitted at the annual general meetings of publicly owned Australian companies in the past five years. In the US, the rapid increase of votes in favor of resolutions amounted to "a pronounced upward spike," according to SIF.

Regarding the pronounced difference in shareowner activism, O'Halloran said, "We have different rules and a different culture. Traditionally, we've preferred engagement. Fro one thing, it isn't easy to submit a resolution. We need 100 different shareholders and five percent of capital."

While the newly formed
Australian Ethical Climate Advocacy Fund, will, according to a press release, "Invest in and seek to influence the behavior of all the largest Australian companies, and put forward Australia's first shareholder resolutions on climate change issues," O'Halloran said that the process will differ from that in the US.

"The new climate advocacy fund is designed to vote, but the process ensures confidentiality," O'Halloran said. "In the US, resolutions get raised in part to attract press attention. But in Australia it's done privately."

"As this industry grows and matures, we'll all start to find a place where we're most comfortable in our journey toward a changing finance sector," O'Halloran added. "There are many roles to play, and the skills are getting better and better in all areas."


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