Investors Hold the Golden Ticket to a Better World?

They say money makes the world go round. That may explain why people are increasingly looking to money (capital) to step in to solve the world’s problems. according to Simon O’Connor, the CEO of the Responsible Investment Association Australasia.

They say money makes the world go round. That may explain why people are increasingly looking to money (capital) to step in to solve the world’s problems.

Perhaps it’s not too surprising considering that eight out of the top 10 fund managers in Australia (who manage over 50% of all the capital invested) call themselves responsible investors, having signed the UN Principles of Responsible Investment.From Governments looking to investors to deliver social services and build hospitals and schools, to NGOs targeting super funds to solve the climate problem, it seems everyone thinks investors could hold the golden ticket to a better world.

These are lofty sentiments, and it would be fair to say that we’re not quite at the point where all our capital is being invested in the best interests of the future of the world, but it’s worth paying attention to the subtle shifts that are occurring.

These eight of the 10 biggest fund managers in Australia call themselves responsible investors because of a realisation that to invest money in a truly responsible way – in a way that looks after the interests of the ultimate beneficiaries, protecting our nest eggs to deliver strong, sustainable long term returns – requires us to pay attention to the environment and society.

What has become ever more clear in recent years is that you can’t hope for long term strong financial performance if you don’t look after the environmental and social capital that underpins that performance.

The list of corporate failures that have resulted from companies not mismanaging their balance sheets but rather mismanaging their workers, their pollution, their internal ethics or their governance structures gets longer and longer by the year. Think News Corp, BP, Gunns, and James Hardie.

It’s been well documented that around 80% of a company’s value is not financial value that we find on the balance sheet, but rather intangible values that are much harder to define, yet remain material to the success of a company – culture, brand, management quality, OHS standards and so many more.

In the language of responsible investment, these environmental, social and corporate governance factors (ESG) are risks that must be taken into account in all investment decisions, or you’re only getting half the story.

As a minimum, responsible investors assess ESG risks as well as financial risks in all their investment decision making. They do more research, more analysis and have a deeper understanding of all factors driving the future share price of the company they’re investing in. It’s a start.

And it’s an important start, because already the money invested by superfunds dwarfs the entire value of the ASX and Australia’s national GDP. And by the late 2020s, it’s likely to have grown to be many multiples of the size of our economy, with an anticipated $7 trillion in the super industry.

Where will all this money go?
It means that the trend whereby most super funds are considered universal owners, having a stake in the future of the entire economy (as they really can’t help but own shares in all of it), will only get stronger. And when you own the whole economy, and you’re investing on behalf of people who want their money to grow for a few more decades, it certainly focuses your attention on the big issues that are driving our nation and the globe’s future.

There’s no question from responsible investors as to whether we need to worry about climate change, or rising populations and growing cities, aging population, geopolitical power shifts towards Asia, life beyond mining, and many more issues of that ilk. This is all part of good, prudent, responsible investing.

These are all issues that must be managed if we are to secure long-term sustainable financial returns.
Hence, we’re seeing a great interest by the big end of town in funding social impact bonds that help deliver social services; or a Clean Energy Finance Corporation that helps investors take a stake in opportunities presented by shifting our economy to a lower carbon footing; or investing in climate themed bonds issued by the World Bank; taking a position in sustainable agricultural production, green commercial buildings and so it goes on.

We now have responsible investment products across all types of financial products, from banking to super funds, term deposits, mortgages, bonds and beyond. The responsible investment landscape is in a sense blooming.

And, pleasingly, there are some early signs that customers are responding and slowly starting to ask themselves, what’s my money up to?
Whether money really does make the world go round, or whether it really can solve the world’s problems is yet to be seen, but one way or another, it’s likely to be playing a pretty important role.

About the author

Simon O’Connor is the Chief Executive of the Responsible Investment Association Australasia (RIAA), and has more than 10 years of international experience from both financial services and sustainability spheres.

O’Connor has worked as Director and Senior Economist for the public-interest economic consultancy, Economists at Large, a Senior Responsible Investment Analyst in the UK and Australia at Innovest Strategic Value Advisers (now MSCI) and most recently as Economic Adviser in the leading Australian environmental organization, the Australian Conservation Foundation (ACF).