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Destroyed: Four Myths About Sustainable Investment


As Australians increasingly seek clean, green investments, it is important for investors to sort the facts out of fiction.

Sustainability is fast becoming a key issue for Australian investors. Institutional investors have been involved in environmental, social and governance (ESG) issues for over 20 years. But over the past five years we have seen an explosion of interest among retail investors.

Although the emphasis on sustainability is a positive step, there are common misconceptions around ESG. Given the growing activity of investors in this area, a record should be set.

Myth 1: Sustainable investment means less profit

The idea that sustainable investing means donating profits has traditionally held back skeptics. But nowadays it is less of a concern. Evidence that what is good for the planet and humans can be beneficial for the portfolio as well.

We know that quality companies with strong ESG practices are often very resilient, can be more productive and probably better at managing risks and seizing opportunities.

For example, companies that have invested in the work-life balance of their employees are less likely to be affected by the Great Resignation, a global phenomenon after COVID, when an estimated 30% of employees leave their current jobs.

It is no longer a matter of avoiding environmental fines and enforcing the rules.

Companies that have adopted zero waste in the early stages may attract new markets to young consumers concerned about plastics in the oceans. Similarly, millennial and younger generations look not only at sustainability when shopping, but also when choosing a company to work with.

However, there is a caveat in this. Some funds managed by ESG may invest significant funds in technology companies because of their low carbon emissions and environmental performance.

This can mean ignoring social and management issues such as company ethics regarding data privacy or potential negative effects on users ’mental health. These risks are not easy to measure, but they can have a high cost to society and also affect a company’s profitability in the long run.

Myth 2: The best way to make a positive impact through investment is to get rid of “sin shares”

So-called “sin” actions usually cover alcohol, tobacco, gambling and fossil fuels. Despite their often damaged reputation, avoiding these companies may not be the most environmentally friendly strategy.

As an example, we often see smaller oil and gas companies struggling with access to capital because no one wants to be associated with these industries. But without contributing to the fossil fuel industry, investors are losing their place at the table and the opportunity to use their voice in the company.

That voice can make a difference. In mid-January 2022, ExxonMobil announced that it would achieve net zero greenhouse gas emissions by 2050. This is a step in the right direction, which was achieved due to investor pressure. If everyone had left ExxonMobil, this effect might not have been achieved.

Myth 3: Sustainable funds invested in “bad” companies must be environmentally friendly

Mention sustainable investment, and niche sectors such as affordable housing, renewable energy and biotechnology – or companies like Tesla – often come to mind.

However, it should be remembered that some of the world’s largest companies not only have a lot of power, but also supply products that are important to consumers – and fund managers can play an important role in maintaining their honesty about any green initiative.

Funds are taking steps to identify green clearing. When the green commitments are announced, we want to see evidence of what will be done. We are asking for specific targets for the elimination of fossil fuels, and we are asking whether the board has approved these targets.

The result is that sustainable investment funds can invest in these large companies, but it is important to make sure that the fund manager uses their voice and influence to bring about change.

Myth 4: You can’t invest sustainably in Australia because ASX is full of company resources

The resource sector is indeed controversial in part because of its destructive nature, which can mean a large impact on the environment and a negative impact on local communities. But investors should not just avoid stockpiles of resources. This sector plays an important role in the transition to a low-carbon world.

Companies like Rio Tinto and BHP are major producers of iron ore, a major raw material for steel that plays an important role in decarbonization because it is needed for things like wind turbines and electric vehicles. Other resources, such as lithium, are also important in creating batteries that are key to accelerating decarbonization.

This goes back to fund managers who use their voice and influence on companies to change behavior to manage their environmental and social impact. The asset manager has these capabilities and can be an advocate for investors.

Investors looking to add sustainability to their portfolio can test the ESG fund’s commitment in a variety of ways. Look at what the fund is trying to achieve – for example, zero net emissions by 2020. Ask if the fund has a plan for these changes and whether it demonstrates engagement with the companies in which it invests. Consider the resources the fund allocates to achieve its ESG goals – is it just one person or a team of 30 people?

By looking at whether a fund is certified by the Responsible Investment Association of Australia (RIAA), one can gain additional confidence that the fund is fulfilling its promise to invest responsibly.

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