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For performance and impact in ethical investing, conviction is key

Ethical investing is rightly associated with driving change for people and the planet, but because it's about being highly convicted on long-term themes, it also a means to drive better portfolio performance according to Australian Ethical.

Responsible investing means having a dual focus on investment performance and the impact those investments have on people and the planet; it doesn’t mean a trade-off on returns. According to Australian Ethical CIO Ludovic Theau (pictured), a good ethical framework requires high conviction, and the rest should follow.

It starts with a theory of change – choosing to invest in companies with a net positive action and being willing to activate change through engagement. By signalling that example and collaborating with co-investors, it’s possible to have an even bigger impact.

“If all of that happens, portfolios will benefit, and investment performance will be better,” Theau said recently to an audience of advisers, fund managers and economists at The Inside Network’s Investment Leaders Forum in Noosa Heads.

  • “If we’re successful, we’ll see more capital going into ethical investments. And because it’s a virtuous circle, the impact and the performance will both improve over time.”

    Ethical research involves having a clear framework around what ethics means, defining ESG factors and where the investor want to have an impact, and the “absolutely critical” element of stewardship – influencing companies through voting and other shareholder actions, driving engagement, and divesting when there is no alignment.

    Once the ESG framework and priority factors are established, they help drive a thematic approach, Theau explained. For instance, Australian Ethical takes long-term views on the climate transition, which generally leads it to invest in non-cyclical sectors. And because it seeks to invest in the “leaders of tomorrow”, it has a slight bias towards growth and small-cap stocks.

    All about conviction

    Fundamental research is key to the fund’s performance in active equities, and Theau believes it supports the ethical investment approach and can drive better outcomes.

    “By developing an ethical methodology, I’m trying to get a higher level of conviction,” he said. “That’s what this is all about.”

    An important debate in the ethical investment space involves divestment from companies that don’t align with an ESG approach and whether advocacy is possible without investment. It’s a “live discussion” Australian Ethical has internally, Theau said, but he believes it is possible.

    “I think the challenge with advocacy in investing is that it takes a lot of time, manpower and resources,” he said. “I prefer to associate investment with advocacy or stewardship – and if we can’t get to alignment, then we can divest. But most of the time, we get to alignment.”

    It’s part of the bigger discussion around transition and how to push companies towards ethical goals. One path is being a pure investor and only investing in pure, clean companies; Theau says transition-centred funds, on the other hand, “make a lot of sense” and are something Australia needs to work on, particularly in the listed-equity space.

    “I’m a strong believer that you have to play with the dark side,” he said. “You to collaborate, and you have to bring these companies on this path.”

    And, importantly, invested companies are generally responsive to engagement efforts, Theau said.

    “In my experience, if you develop the right partnership and the right level of collaboration, they’ll go beyond your own expectations.”

    Lisa Uhlman

    Lisa is editor of The Golden Times and has extensive experience covering legal and financial services news.

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