There has been a fundamental shift in how investors view responsible investing of late, whether they are large institutional investors or private families and individuals.
Until recently, responsible investing was chiefly seen by investment managers as an opportunity to manage portfolio risks while also enhancing returns1 – and understandably so. Across academia and the wider financial community, a growing body of research is confirming that integrating environmental, social and governance (ESG) factors into investment analysis and decisions can have a beneficial impact. In fact, 2,000 academic studies have indicated a significantly positive relationship between ESG factors and a company’s financial performance.2
Yet the crisis we currently find ourselves in has put real-world, sustainable outcomes front of mind for many. For the first time, the UN-backed international body, Principles for Responsible Investment (PRI), is seeing its signatories – a group of asset owners and investment managers with US$103.4 trillion assets under management – “looking beyond the impacts of ESG risks on their portfolios to understand the impacts their portfolios have on the real world around them”, according to outgoing PRI CEO Fiona Reynolds’ latest quarterly update.3
Closer to home, JBWere has also witnessed a shift in attitude among its clients. “Every single client has a view of the world and what is important to them, whether they’re an ultra high net worth individual, family office or a for-purpose or charitable organisation. But this hasn’t always manifested in their portfolio,” says JBWere Head of Alternative Investments & Responsible Investing Gillian Gordon. “That is what’s changing. People are going from talking about responsible investing, and what their ethics and principles and values are, to actually wanting them reflected in the way they invest.”
The pandemic only accelerated this trend. “Over the past year, I’ve seen a massive shift in not only our clients and what they talk about, but also how the whole of the finance industry is stepping up to that,” Gordon says. “It’s no longer just a few niche players anymore. It’s actually becoming quite mainstream.”
Unlike an asset’s financial risks and returns, however, the social and environmental implications of a particular investment aren’t so easily quantifiable. At the end of the day, there may not be a neat, finite figure that can prove your portfolio is adding value to the world.
Gordon believes this is largely due to the nascency of certain parts of the market. “Because it’s such an evolving space, globally and locally, there’s not a perfect dataset that exists. If you want to know, what is the impact of a specific investment, that’s not an easy question.”
Similarly, it’s difficult to compare like for like, she says, due to the fact there aren’t yet agreed global impact reporting standards.
It raises the question: how do you ensure your capital is being invested in a way that truly makes a difference?
Largely it’s about getting comfortable with the assets you’re investing in. Gordon notes that Australia is a highly regulated market, so there should be fewer concerns here. Yet the very fact the market is so new in certain areas does require caution. “The key is to do your due diligence or to partner with someone who can do that due diligence for you,” she says. “It’s really important to understand what it is you’re investing in and what is the due diligence process that helps you to understand how legitimate and authentic the responsible investment is.”
JBWere Executive Director Tom Goode agrees. He points to the tools JBWere chooses to rely on – most notably the world-leading database of MSCI4. “It’s an incredibly powerful tool,” Goode says. “It has a huge depth of information on tens of thousands of companies and investments globally, across a wide variety of metrics.”
JBWere uses this, and the depth of its research team, to identify ESG risks and opportunities, but also to tailor clients’ portfolios to their particular principles, ethics and values. For instance, when a large private family wanted to invest to minimise their carbon footprint, Goode used readily available information to create a portfolio that had a lower carbon footprint than the broader market.
“That’s one of the clear ways we can measure the carbon footprint ourselves,” he says. “For this particular family, we managed to create a portfolio that has a carbon footprint that is 90 per cent lower than the equity market.”
Nevertheless, more and more clients are becoming interested in impact investing. An impact investment is one where the positive environmental or social benefits can be specifically measured and reported.
As Gordon explains, it’s a very specific way of investing. “For an impact investor, having an ESG overlay and an ethical filter isn’t enough. You have to be able to measure, monitor and report on the impact.”
Despite the rise in investor interest, impact investing currently suffers from a lack of suitable investment opportunities. However, JBWere has already launched a number of equity and fixed income impact funds, and more recently it launched its first pure alternative assets impact fund.
It’s probably not surprising that it’s been very popular. As Gordon says: “We’ll just have to keep on finding more.”
And in the meantime, there are other ways to help make a tangible difference. JBWere recently released its Responsible Investment Policy – arguably the most exhaustive and ambitious of its kind in the Australian private wealth market. In line with international best practice, it sets out JBWere’s current approach to responsible investment, as well as its aspirations for the future. One of its core pillars is around influence – through stewardship, engagement and advocacy.
“Our scale and our access give us an opportunity to apply influence in order to drive performance,” Gordon says. “Our advocacy work is really about giving our clients a platform and a voice to influence positive change with fund managers and with companies. That’s what I think is the next big evolution in responsible investing.”
While Australia is behind Europe in terms of its work on investor advocacy – 10 years behind, according to Gordon – there is still much firms like JBWere can already achieve due to their scale and size. Clients, for instance, can exercise their right to vote through their direct holdings on the JBWere platform. Then there’s informal advocacy, where JBWere uses its influence and scale to shape change at the fund manager level.
Goode provides the example of an international equity manager that had a fairly significant weighting to the tobacco sector within its portfolio. “We gave them the feedback that a number of our clients were not comfortable with that, and indeed, over time, we suspected they would be selling out of their fund if it retained that tobacco exposure.”
It helped that a reasonable number of JBWere’s clients had funds invested in the portfolio. Shortly after, the manager responded by offering a separate version of the fund that excluded the tobacco investment.
In another example, JBWere was similarly successful when it realised that a fund manager had basically no female representation at any senior level of its business. “We gave that feedback to them and they took it on board,” Goode says. “Indeed, they came back and thanked us for being bold enough to bring that to their attention.” Since then, the fund manager has outlined a policy for building more diversity into the business and, as Goode says, a couple of recent hires have started to improve that gender balance.
But JBWere aspires to do even more.
“Our big ambition as a firm is to build out formalised advocacy, that is, proxy voting,” Gordon explains. “For example, when Rio Tinto destroyed Juukan Gorge, a place of exceptional cultural significance, shareholders made their voices heard. Certain super funds really stepped up to the plate and exercised their advocacy and voted against the remuneration of the executive of Rio Tinto on behalf of their members.”
Currently, no Australian private wealth firm does this. And JBWere wants to change that. Its ambition is to aggregate the voices of its many clients to ensure their vote counts in such a situation, to influence for positive change and hold company leadership to account.
It’s easier said than done though, Gordon admits. After all, JBWere’s clients are many and varied in the values they hold dear.
“As a private wealth firm, you’re representing an enormously vast array of client viewpoints and we must respect those varying viewpoints,” Gordon notes. “That’s the challenge – unlike a super fund or asset manager, which can take a view and doesn’t have to worry about explaining it down to their individual members. Our job is not to tell the clients what to think; it’s to represent what matters most to interested clients.”
An important part of the process, therefore, is allowing clients to choose whether or not JBWere advocates on behalf of their holdings.
That doesn’t make for an easy solution. However, Gordon isn’t deterred. “It’s an enormous undertaking, but that’s the big next step for JBWere.”
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