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Ethical Investment Series #15 – Transcript

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Ethical Investment Series

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SUMMARY KEYWORDS

esg, investment, advisors, portfolio, area, companies, australian, investors, big, funds, managers, terms, ethical, fraser, invest, fund, global, fantastic, australia, sectors

SPEAKERS

Fraser Jack, Elizabeth Hatton, Philip Moffitt, James Harwood, Paul Garner, Alexandra Brown

 

Fraser Jack 

Welcome back to the x y advisor podcast. I’m Fraser Jack and today we are wrapping up our five part series on impact or sorry ESG, with a bit of an overlay of impact investing. Welcome back to the podcast. Philip Moffat. Hi, Fraser, thank you for joining us today we’re talking about the the concept of supply and demand. And in particular, where do we find all these companies? You know that I sort of think of the ASX 200 is a fairly small pond deficient when it comes to companies that are, you know, deep or deeper into the green. So let’s let’s talk about where do we find? And how do we how do we go with this supply and demand equation when it comes to finding ESG? companies?

 

Philip Moffitt 

It’s a great question, because as we’ve discussed in the previous episodes, the whole idea is really still in its infancy. And the way historically these kind of topics have been addressed is through explosions. So you just say I’m just not going to invest in arguments or alcohol or whatever it happens to be. Whereas now, the idea of ESG addresses first being the subtleties that are work across the entire universe of assets. And secondly, the benefits that some of those subtleties can bring non financial outputs or businesses can bring to valuation sustainability, as well as the negatives. And because there’s no agreed set of standards, what you tend to find is if somebody brings a PSG or sustainable product to an advisor, it very often will be constructed around a set of exclusions. So just say, I’m not going to do all these things, therefore, a qualifies as being ethical or ESG, or whatever, you know, brand label you want to put on. And, and we’re on a journey to go further than that. But until the metrics improve, and are more universally accepted, it’s going to be really hard to verify as you go, so I think it’s a it’s a matter of, again, as we said in the previous episodes, the advisor, not really understanding the preferences of the client, and then also having to spend some time with the provider of the asset service to really understand what they mean by ESG and impact.

 

Fraser Jack 

So if I’m thinking of this, if somebody comes to me with a conversation around just exclusions, is it does that sort of say that they’re only working in a space where, you know, they haven’t now moved into that exclusions plus influence? Or? Or the balance between the

 

Philip Moffitt 

two? Yeah, yeah. So So the real power for the investors, particularly investors, who are who are working in in groups, so you know, you’ve got somebody who’s managing a large enough pool of capital they can have an influence is that instead of just saying, I’m not going to invest in your business, because it doesn’t make, you know, whatever criteria I’ve set, is, I’m actually going to invest in your business. And I’m not going to sell out because I’m going to work with you, to take you on a journey to improvement. And this is the big question, let’s let’s think about a great example is for the super funds, post, Rio, and tugann, George gorge, DSL, oh, he reassures. And if you sell all your reo shares, and you’re a big holder, you don’t have a voice at the table? Or do you retain them and use your voice at the table to be an activist. And so there’s a big conversation and debate about that amongst big pools of capital. And I’m pretty confident that that’s going to emerge its way down into more fractured groups or capital and, and to the advisor network, where you’ll be wanting to work with either investors who use their voice to try and improve the outcomes that matter to you. And those who do sound are going to get involved in that. And increasingly managers will be evaluated on their ability to create change as well as financial return.

 

Fraser Jack 

Yep. And so when they do that, when those big groups do that, they can basically go to the table and say, Look, if you don’t do this, this and this then we’re out. Yeah, that

 

Philip Moffitt 

basically. And of course, it’s not just if you think is an investor in the marketplace now in Philadelphia, Fraser Jack is an individual investor. If I see all the big pools of capital going to an organization say unless you approve these five things, we might withdraw our capital. might sell that stock before they sell the stock. So where I think they’re going to have an impact on my board buy more of the stock because I think they’re going to. So it’ll have an echo right through the Marketplace, as these bigger, more influential pools, roll their sleeves up and actually go

 

Fraser Jack 

to work. Yeah. Okay, interesting that they are talking to me about the size of the Australian market in this space. And you mentioned sort of in some earlier messaging that we were a little bit behind with some of the stuff. But I also feel like we’re a little bit in front, too, when it comes to some of the, you know, social impact we’ve obviously had, the governance around our businesses has been a little bit higher over the year. So we felt like we were a little bit ahead in some spaces, and as well as bear behind where do we sit for other global managers looking at Australia? I think

 

Philip Moffitt 

I think in previous episodes, I’ve referred to Europe a few times, you know, Europe is much further evolved, particularly Northern Europe much further evolved in terms of thinking about ESG, and sustainability issues and the way they invest. But Australia has a has a strong history in the space as well, I would say that some of the larger pools of capital that have been put together here, in particular, the kind of the industry, super funds, who, who thought about their members interests, and their members tend to be concentrated in different sorts of industries, and so on. So they’ve managed to prioritize those members interests in a, in a more concentrated way, this is what matters to us. And they can use that to help influence the investments they make themselves. So that’s evidenced in in what they do. So I think about a where, for instance, who generate very strong financial returns, but out of affordable housing, and affordable housing, it’s important for our members who are teachers and nurses and healthcare workers and those sorts of people. So it works that way. It also works to the extent that we have a range of really high quality ESG ethical impact strategies emerging in Australia. And we also have a bunch of managers who’ve been using those sorts of approaches, even though they’ve not kind of labeled themselves that way, emerging in the space. So you know, I I’m very optimistic, particularly as the younger generation of people mature and they have more assets to invest, and they start to demand more than just financial return, that were an inevitable path towards ESG. Sustainable impact is as a quarter Matic

 

Fraser Jack 

Yep. And you mentioned Europe a few times are being you know, the the leaders in this space. Why is that?

 

Philip Moffitt 

I think, a recognition of aging population, a recognition of, of social welfare state and the costs of environmental and social degradation directly hitting the national balance sheet. So if you, if you like you think about scandium, for instance, or Northern Europe, where the government’s on the hook for healthcare, and education, and employment outcomes, and so on, the direct costs of poor ESG are felt by the public purse. And so it makes a lot of sense for that to be prioritized as a preference to places elsewhere in the world where you don’t necessarily have that social cost burden, and profit maximization financial profit maximization doesn’t cost it come as much about a measurable social cost. Yep.

 

Fraser Jack 

With regard to the size of the, you know, the global pool of investments, when we put the ESG overlay, and we’re going for, say, a medium green, you know, whatever it might be, then, then how much does that reduce the size of the pool?

 

Philip Moffitt 

I don’t know phrase, to be honest, probably, I should know that. But it’s going to be substantial to be investing in in pools that you really believe have a commitment to measuring and monitoring and governance, and to be able to reporting at some level around those things. You know, I think you’ve reduced the global pool by 80% or something. But amongst very big global institutional investors, that gate is already quite high. So that 80% that’s being excluded, is already excluded and not getting much of a look.

 

Fraser Jack 

Yep. Does that mean that the other diversification across other sectors is becomes less important if we’re focusing more on ESG? No,

 

Philip Moffitt 

that’s actually a really good question. Because I think some sectors lend themselves to ESG, measurement and verification better than others. And so it is possible that you get a bias towards those sectors in portfolios that are dedicated ESG. And, and so from a portfolio construction perspective, like a total portfolio approach, you’d want to certainly want to be mindful, that you don’t end up with let’s say you employ three global ESG equity managers, and you find that they’re, they’re sort of all super mega overweight, alternative energy and nothing else. And what you end up with is in an Alternative Energy Fund, you want to be you know, very cognizant of that, going forward. But I do think that, you know, this is just a view it’s not I can’t verify it. That as investors and investees come to realize that that those metrics matter that they’ll proliferate across all sectors, it’ll become the ubiquitous.

 

Fraser Jack 

Yep. And what do you think advisors should be looking for when it comes to the investment philosophies of managers?

 

Philip Moffitt 

I’ve personally, I’d still be looking for an investment manager who’s talking first and foremost about financial return and diversification benefits within a portfolio. So you know, what are you looking for, you’re looking for an asset, that’s going to give you a really strong returns. And that’s going to reduce the risk too much to the extent that you can by diversifying your portfolio. So they’re the two major drivers. If somebody comes in and they’re pitching ESG, or impact, first, and return second, I would be skeptical, not because I don’t believe in those things. But I just don’t think that it’s long term sustainable to build a business around something that’s not going to generate competitive financial returns. If the assets don’t generate competitive financial returns, the strategies won’t survive. So it’s incumbent upon us as managers to to communicate clearly that we think those two things go hand in hand. And if you’re not communicating that, clearly, I’d be skeptical of the offering.

 

Fraser Jack 

So it’s a real balancing act. Isn’t that the sustainability of the the client’s portfolio, as well as the sustainability of the the underlying investments and the sustainability of the advisory practice it all sort of? Absolutely. But at

 

Philip Moffitt 

the end of the day, you know, it sounds crude, but you got to make returns to your client. Yep. Otherwise, businesses won’t flourish. Yep.

 

Fraser Jack 

Fantastic. Philip Buffett, thank you for joining us in this series, if somebody wants to quick, just quickly, if they wanted to get hold of you, what’s the best way to continue the conversation with me,

 

Philip Moffitt 

or you can find me on LinkedIn or bacon capital website, or just type, you know, Philip Moffitt into the Google later, and I’ll pop up. You know, I love this stuff. And I’m passionate about it. And I’d love to engage with anyone who wants to have a conversation. So you know, don’t hesitate. I’m on LinkedIn as well. Brilliant, natural.

 

Fraser Jack 

Brilliant. Thank you, Philip, really appreciate your time and energy and putting into the series. Thank you so much. I

 

Philip Moffitt 

can see Fraser thanks.

 

Fraser Jack 

Welcome back to this final episode. Elizabeth Fraser, thank

 

Elizabeth Hatton 

you for having me.

 

Fraser Jack 

Thank you for coming along the journey with us over the last five episodes, I really appreciate your input. My pleasure. In this In this episode, I really want to lean into the concept of supply and demand and thinking about where can advisors and fund managers that say find these these ethical investments and especially around the idea, the concept of the ASX 200 is quite a small pond efficient, I guess you could say, do you think that we need to look globally for these types of businesses? Or as we find them within Australia?

 

Elizabeth Hatton 

I think fish, there are some companies in Australia trying to do the right thing. If you’re talking about individual companies, and not funders that I think that we’re way behind the rest of the world that have already decided that ESG is the new normal. And there’s no question about AI, possibly, because the policies are different governments in other parts of the world clear as as about how we’re going to tackle these issues, because they seem to be more forward thinking in terms of investing to address the issues of climate change and climate degradation genuinely, which is what they’re looking to do with renewable energy type assets, and to possibly even reverse some of the effects of climate change.

 

Fraser Jack 

Yeah, interesting. So you think, obviously, the, the governance side of this is around, you know, what’s required by Australian law. So you think Australian companies are falling behind in that way, because the government hasn’t been as progressive.

 

Elizabeth Hatton 

I think I think that the government sets policy and then companies respond to the policy in different sorts of ways. And so that they’re taking things into account. I think that ethic is looking more and more towards making companies accountable for what they’re doing. But I think fish ethic hasn’t actually been as diligent as they could be in terms of pursuing super funds in particular, about what they’re doing, although they’re starting to now. And governance is not just about what it is that companies are doing. But governance is also about how companies can address the wrongs that have happened as a result of previous policy, and what they’re going to do about it. And I think that the S path of use and GE in relation to the societal impacts of what companies are doing, is becoming more and more important. And it’s difficult to put $1 value on this. But it’s right up there in terms of people’s feelings and emotions about right and wrong.

 

Fraser Jack 

Yep. Yeah, that’s certainly a very big one, isn’t it the idea of things like human rights or the social impact of that productive play in society? Yep.

 

Elizabeth Hatton 

And what you’re talking about in terms of impact is also important, because there are some funds that are out there that are impact funds. So they’re what they’re actually doing is to put money into a particular exercise or a philanthropic type of offering that will go on to fund address mental health issues or inequality in terms of housing, or funding medical research. And so that’s another bucket of assets that people could invest in that make returns for them. But also that they have a feelgood factor that, you know, we’re actually contributing to medical technology or whatever. It’s not quite answering your question, but it’s out there in terms of all sorts of assets that one can invest in,

 

Fraser Jack 

you know, should we be worried about diversification across different markets and sectors? And if we’re focusing solely or not? Well, firstly, I guess on on ESG types investing is that does the diversification come in later or, or is needed,

 

Elizabeth Hatton 

diversification comes in first. Because different asset classes because of the nature will sort of go up and down in terms of value. And price and diversification, is there to adjust the ups and downs of what’s happening in particular asset classes, and how much of a risk clients prepared to take with the funds within each asset class, the is an ESG type factor that can be applied, I know that the real estate sector, for example, is looking to put ESG and looking at government looking at the green and environmental impact of what they do is a really big thing in terms of promoting the type of investments that they have.

 

Fraser Jack 

Yep. Until the end, it just seems like it’s it’s forever changing and moving environment had an advisor stay on top of all this,

 

Elizabeth Hatton 

I think that advisors, sort of giving pretty much swept up in there, we have to find something for clients. And I think it’s also important to step back and to figure out what you know, what’s reasonable with a fair amount of certainty? And to be critical at all times?

 

Fraser Jack 

What are you looking for when it comes to you know, the philosophies or the investment philosophies behind some of the funds? What do you look for?

 

Elizabeth Hatton 

I’d like to say that they have one yet to start with, and how it actually applies, and what they’re doing in terms of approaching said companies within the fund, about what they’re doing and how active they are heavy reporting on things, and what progress they’re making, if any.

 

Fraser Jack 

Do you see a lot of the the just going back to the concept of Australian companies versus global companies? Do you see a lot of the current funds sort of stacking themselves for that global company situation? Or are they still?

 

Elizabeth Hatton 

Well, I think I, I think that investing in what’s happening locally is not as big as you think you think you know, what they’re doing. But that really, I mean, companies are as open as much as they choose to be. But Australia is really a very small fish in the world, in the world of money. And I think that we’re sort of between one and 3% of what’s happening in the rest of the world. And not to have any exposure to what’s happening in the rest of the world means that you’re missing out on opportunities to invest in companies that actually are making a difference and trying to make a difference in a bigger way than what’s possible in Australia because of our population size.

 

Fraser Jack 

Fantastic. Thank you, Elizabeth Hatton, for coming on the series. I really appreciate you being part of it. If somebody wanted to reach out to you and have a continual conversation, what’s probably the best way for them to to get

 

Elizabeth Hatton 

they can look on our website, vivre fp.com.au. And is a conversation box and drop me a question or emails and the various page or condrieu and be happy to take your call.

 

Fraser Jack 

Cool enter now. Fantastic. Really appreciate your time and energy into the series. Thank you so much.

 

Elizabeth Hatton 

Thank you. Thank you.

 

Fraser Jack 

For gala, thanks for joining us in this final episode of the series where we’re talking about supply and demand fit around ESG.

 

Paul Garner 

Yeah. G has in both areas, greatly increase in the last few years. It’s been wonderful, and certainly made our job easier. And, and also given the the investor, a lot more choice because in the past, we had a fan of really difficult to find ESG options in the fixed interest area in the cash area. It’s still difficult in cash, but fixed interest has been a major increase in fat area property is still a specific area that that needs more supply, I guess. And also, what it means as a as an investor, the Australian market is much more immature than the global market, particularly in the areas of renewables and making industries more efficient, you have to go global. So often, an ethically filtered portfolio will be more tilted towards international exposure, because there’s just more mature companies in this area that either people want to support or or avoid. And you have to go, it’s just the nature of the Australian market, it’s made up of minors and large banks. So to develop an Australian portfolio, you have to go down to more medium size smaller companies, which inherently increases the risk and may not suit where people are at in terms of the theme of their portfolios. So you have to go into you have to go international. And you’ve got to

 

Fraser Jack 

really, it’s interesting, isn’t it? Then you mentioned image? Sure. So I’m just just by the nature of, of the services that we’ve been strong in with how do you see is moving, moving quickly towards it? Well,

 

Paul Garner 

quickly, in terms of quickly is variable depending on how long it takes for a company to be investable, in a broad sense, in a in a more regulated sense. So there’s many startups and smaller companies that you can invest in. But we’ve also got to be so cognizant of the risk involved in that. And so what we’re seeing a greater demand and integrated supply of is impact investing where people, I guess, with the more sophisticated investor or those with larger amounts of money, which whose philanthropy is is more of an issue. But they also want to see your investment return, is having investments in things that will make an impact in terms of obvious areas are social housing, where housing is made available for a greater percentage of the population, but it’s also a viable investment return green bonds in the general area of impact investing in terms of making a real positive contribution and but also seeing an investment return is probably the biggest growth area. Now at the moment, that’s more of a niche because they’re typically aren’t listed. Opportunity it’s it’s more of an unlisted, enhance, riskier, less regulated area that’s more open to the sophisticated investor, or those with larger amounts of money that can then spread that across different areas. So that I see more growth in that area coming forward.

 

Fraser Jack 

The problem probably a little bit more difficult for advisors to get too involved in that, isn’t it? Because I think this certainly needs to be an amount of individual investigation from the from the actual estate,

 

Paul Garner 

indeed less research available about that less track record. But I know some of my colleagues who are much more advanced and I much heavily involved in that area as well.

 

Fraser Jack 

Fantastic. Now, you mentioned Australia being an immature market, which markets do you see is more mature, which which are the areas in countries so you see there’s there’s, you know, they’re well ahead of us? Well,

 

Paul Garner 

you know, the major economies us, Germany, Northern Europe, you know, those major Italy, Germany, Scandinavian countries have such nice nation a global sense but amazing stories of of companies that help to make not only wind farms, or not The sorts of things but I heavily involved in making existing industries more efficient in terms of equipment or in terms of waste, renewal, using waste, making existing energy providers more efficient in terms of the control systems, the machinery, it’s often too too many dimension, but the individual stories can be very, in or not, I think inspiring in what their engineering capabilities are, it is an obvious area, but then you get into social issues, you know, Facebook, and you know, they’re not, they’re not emitters. But, you know, there’s big concerns about this societal influence, and, and the privacy issues, all those sorts of things, the way they influence society,

 

Fraser Jack 

color, the algorithm. Tell, tell me about, tell me about how you go about researching and finding out more information around what the fund managers are doing. Obviously, you mentioned some of the stuff you’re doing with the co op. But how do you personally go about researching

 

Paul Garner 

where I, through my, I work with an investment analyst who also has that passion. So we develop models based on on our research. We also have individual conversations with fund managers who either appear in those models or who were interested in in. So they’re in the main areas just going to the source. And and finding that out. If we need to build a customized portfolio, then I work very closely with analysts whose full time job is to visit companies and sectors and what they’re doing.

 

Fraser Jack 

So for advisors getting or introducing into the space that are a bit sort of near in their journey alone, what what do you suggest to them when it comes to thinking about what their investment philosophies might be? And how they can sort of start to, as you mentioned, it’s not a good idea just to dip your toe in the water, but how do they sort of get more you know how they get a start?

 

Paul Garner 

Well, I joined the responsible investment association of Australasia as a good start. And through that, I met individual advisors who also specialized in that area. And they introduced me to the ethical advisors cooperative, which was, I guess, a more interactive because the response investment Association deals with fund managers, advisors and the whole industry, were the ethical advisors, corporative is just financial advisors who specialize in this area. And that, and the interaction through that, and with my colleagues in that area has been a huge, huge value and and accelerated my learning much more so than I could ever do on my own. And so that was a big, that was a big influence. So I would encourage advisors keen on this area to get involved in those two organizations. Because if I just try to impart my values onto onto the people I talk with, it’s all about them, their values, and having that reflected in their, in their portfolios.

 

Fraser Jack 

The amazing it’s interesting, isn’t it, this this thing keeps coming through the idea of being active in a community of other people that are doing the same thing. And all of a sudden, you sort of you learn from them, you learn from yourself, you learn from the literature, you learn from all the moving parts, so that’s the ri double A, with the association. And, again, the co op, like x y.

 

Paul Garner 

It’s wonderful, but what exactly is the wonderful sharing community and, you know, it’s, it’s, it’s wonderful because we essentially, we’re all competitors, but then we all cooperate on these on these areas, which is great. It’s nice to be part of that.

 

Fraser Jack 

There certainly is a nice amount of sharing across all the platforms. So Paul, thank you so much for being part of this of this series really appreciate that if somebody wanted to continue the conversation or get hold of you what’s probably the best way for them to reach out

 

Paul Garner 

is my website note novo wealth.com.au please share my email and and number very happy to have a chat and if people in the right directions

 

Fraser Jack 

fantastic ER nurse you’re also on LinkedIn there so they all have

 

Paul Garner 

their socials and should be there. Hopefully.

 

Fraser Jack 

Fantastic, Paul, really appreciate your coming along and sharing your wisdom with us or

 

Paul Garner 

you. Thank you very much for your interest.

 

Fraser Jack 

Welcome back. Alexandra brown to the sale final episode in this series. Thank you for joining us.

 

Alexandra Brown 

Thanks so much, Fraser.

 

Fraser Jack 

Fantastic. Now we’re talking about supply and demand. Obviously We’ve sort of mentioned this in a few of the earlier episodes. But let’s start with the concept of, you know, finding finding the right option. We’ve talked about prioritizing and finding the right options. And, you know, when it comes to the funds, when it comes to the fact that you know, even even in Australia here, we’re a fairly small, small pond deficient.

 

Alexandra Brown 

Yeah, we are. But you know, I’m not phrase that I’m not actually sure of a use case that would just consider, you know, only the ASX 200 or, you know, just as an investable universe. But there are definitely ASX funds that spring to mind that old classes ethical, there’s an Australian ETF that I find particularly strong, they use really tight screening. And the result is a world of of great Australian funds that I would consider ethical as an ethical smma. There’s two big Australian funds out there. And and even an impact Fund, which has more of the smaller and mid caps as well, that I would consider to be quite deep green.

 

Fraser Jack 

Fantastic. Talk to us about the where we are in the world. I mean, Australia is sort of I thought it was actually quite high with the governance section. Because we you know, we live in a country where there’s a lot of rules and regulations. But tell us about the where Australia fits in the in the global world of ESG.

 

Alexandra Brown 

Yeah, sure that I mean, the global market, it’s definitely not small, it’s huge. There’s the latest GSI report, which is the global sustainable investment Alliance. And they it shows that just over 1/3, so about 36% of professionally managed assets in major markets across the globe are invested in sustainable investments, and the GSI, a report that actually aggregates the responsible investment trends across Australia and New Zealand, US, Canada, Japan, and Europe. And it comes out every two years. And it’s come out just this month. So the results are in and global sustainable investment has now reached 35.3 us trillion dollars across those five major markets, which is an increase of 15% in the past two years. So a great a huge market. And also according to this report. In the past two years, Australia’s sustainable investments assets has grown by 25%. And I do have the I do have reports of Australia to sew in. But unfortunately, it’s not quite as recent as I’m hoping because the benchmark report for Ria is due out in five days. So if you’re listening to the sentence after the first of September, head to rear the rear website and check out their latest benchmark report with updated 2020 figures, but for 2020 2019 we currently have 37% of our total assets under management are responsible investments.

 

Fraser Jack 

So it’s fantastic. Yeah. Tell me about this diagram. We talked about a while ago that you talked that the infographic, we talked about the human getting money to you know that where it’s needed? How does this, he mentioned that we were two and a half trillion dollars behind every year with how does it how does that then relate to that diagram?

 

Alexandra Brown 

So obviously, it’s growing. But you know, there’s a gap between between I guess, getting everyone involved, we all need to be involved. That’s the thing. It can’t just be a select few that are helping to finance the Sustainable Development Goals. We all need to be there.

 

Fraser Jack 

Yep. Fantastic. And tell me about when it comes to choosing or finding funds in this in this global market? Is it obviously a lot harder?

 

Alexandra Brown 

No, I think it’s easy. Because, you know, there is so much more choice. And, and they can get more specialized to there’s a water and waste fund out there. So you know, it’s just focusing on on water and waste management. There’s different renewables fund that you know, so I just think that the, the range is growing.

 

Fraser Jack 

Yep. Fantastic. And talk to me about the, in this case, what a lot of that was to do when we when we talked about research, we talked about the fund managers attitude and, and their, their culture within that, within that fund to be striving and pushing companies. How can advisors keep on top of what fund managers attitudes are at the moment and what they are moving forward?

 

Alexandra Brown 

Yeah. Great question. Fraser. I think that one of the first things I would do is to subscribe to fund newsletters, you know, because they, their quarterly, their monthly updates are so informative about where the markets going, the real responsible investments going and where their fund is going, obviously, attend their webinars, find out what’s going on. Ask them questions, email. directly, you know, they love the opportunity to discuss their ethical options, you know, give it to them and fight and find out more. One of my favorite hacks actually is I’ve signed up to an ethical fund of funds that’s based in Australia. And so each month, they give me a round up of all of the funds that are in this ethical fund cited a round up of all these ethical funds, all in one newsletter. It’s great. I see so much time. But yeah, there’s like there’s LinkedIn groups that aren’t ESD, another shameless plug for our theorum as well the sustainable finance library because as a member, we release a monthly newsletter. And it highlights all the latest trending ESG and ethical investing research it also there’s also a section on you know what to listen to what podcasts are great in the end to listen to what events and, and things like that. Become a member of Ria, as so many great advisor resources with Raya go to the Rio conference each year. If you’re already in this space, join the ethical advisors court because, you know, we network we share ideas we share knowledge, with with advisors, and in the space. So that’s just my few tips

 

Fraser Jack 

on fantastic and I love I love the fact that there’s a lot of, you know, keeping keeping the bankers accountable conversations and especially with the just with, with with the shameless plug for LTE. And I’m probably pronouncing it wrong again. Tell us about how people can can find that, where would they find that

 

Alexandra Brown 

just head to LTE or m.org. And that is a L t i o r e m.org. And just for reference as your RM is Latin for higher, because our our goal is to lift the finance industry

 

Fraser Jack 

higher. Fantastic. Thank you for that. So I think that’s a great resource to go check it out. And of course, the ethical VS code was spoken a lot about in the in Rio, as you mentioned, they do a conference every year. Is that correct? Correct. Yes. Fantastic. Thank you so much for joining us, as somebody wants to get hold of you or talk to you more about what they can do in the space in their own business. What’s the best way they can get hold of you,

 

Alexandra Brown 

they can head to my website, which is invest with ethics.com.

 

Fraser Jack 

Fantastic. You know, you’re also on LinkedIn, if they if they happen to be on LinkedIn. So I’m sure they’ll be able to find you. Alexandra Brown, thank you so much for sharing your wisdom. Your almost pH Dina’s with us Oh, that’s a word. Probably not really appreciate you putting the effort in and sharing everything you have today. Appreciate it.

 

Alexandra Brown 

Thank you so much for that it’s been such a pleasure to be involved in this.

 

Fraser Jack 

James Howard. welcome back to this episode, we were talking about the supply and demand conversation around ESG funds. Welcome. Hi,

 

James Harwood 

Fraser. Good to be back.

 

Fraser Jack 

Thank you now Well, I guess the first the first cab off the rank is the conversation around the the size of the Australian market in this space? Obviously, you know, we’ve we’ve known for many years, it’s a very small piece of the global market. But when when when we’re putting the the ESG overlay on it. How do we go?

 

James Harwood 

Yeah, look, I mean, the Australian market is dominated by mining companies, you know, the material sector is a is much bigger in our market than think globally. We’re over 20% versus I think 3% for for global shares, you know, it is a much bigger component of the MSCI world, for example, I think, you know, in terms of how do we do, and, and pure play type of ESG investments, I think that that’s actually a challenge, not just here, but but globally as well. So I think that really pushes you down a route of needing to understand the ESG characteristics of of all our companies better. It’s one of the reasons we use ESG scores in in our ESG strategies to have a overall kind of assessment of how how strong are companies on on ESG. And then, you know, the reality is that, you know, Australian shares are going to form an important part of all Australian investors because you know, there’s you don’t have the currency risk either. So just using those ESG scores, and overall characteristics is is still going to be really important to you know, to assess a particular investment for for an advisors client.

 

Fraser Jack 

Yeah, fantastic. On the flip side of that question, if an Australian company is doing very well, with ESG scores, is that going to make them attractive to overseas or Global Fund Managers?

 

James Harwood 

Yeah, look at maybe I’ll comment on infigen energy was a security that they’ve got taken over by an overseas company, about a year or so ago in Virginia is a you know it Producers renewable energy, it was our only kind of pure play in that space, and annoyingly was taken over by Iberdrola of Spain. So, I think, you know, that’s an example of, you know, an attractive investment, you know, being swallowed up by an overseas company, but really highlights that point that, you know, that there’s that there’s not enough pure play kind of investments. I think there was another example of an ETF and I shares ETF that had a huge position in the New Zealand listed energy company, and then, you know, that, that that became a real liquidity challenge for that company. So I think it’s really important to understand the pure play types of ESG investments on, you know, there’s probably not enough to go around for everyone’s investing, and then pushes you back to understanding, you know, more broadly, you know, what, what are the ESG characteristics of the companies listed on on our market? And also globally?

 

Fraser Jack 

Yeah, sort of brings that supply and demand conversation really back into into effect, doesn’t it? If there’s not enough around?

 

James Harwood 

It does. It does. Yeah. And I think I mentioned a Danish utility company in the previous session, you know, that that was a good example of just a beneficiary of huge amounts of flows into green or ESG products. That’s been a been a big theme, and it continues to be a big theme, but you want to make sure that you’re not overpaying for securities as well. And, you know, again, it’s trying to find that balance between ESG and investing in a in a sensible manner. And recognizing that, you know, as you say, supply and demand that influences the prices of securities. And, you know, we don’t want to end up with a really expensive portfolio that that that’s at risk of like a major correction. So trying to invest sensibly, recognizing some of those supply demand kind of constraints.

 

Fraser Jack 

Yep, yep, exactly. Right. Now, let’s talk about the concept of, if you’re searching for ESG portfolios, how important is it to think about what sectors in multiple sectors? I mean, in end of the day, are you just looking for the purest of you know, that that mid green range? Or do you have to really go Okay, well, we can’t have that, because we’ve really got too many tech stocks or whatever. It

 

James Harwood 

is a great question. And I think I did a piece earlier, earlier on this, just around the the biases in ESG strategies. So about a year ago, many years ESG funds were doing extremely well, because, you know, the energy sector had underperformed and most of those species strategies don’t have investments in in that area. When we design products, we’re always looking at, you know, that that risk aspect of, so we don’t want, on the whole, we’re trying to design products that give investors the outcomes that they expect. So most investors can’t accommodate like huge periods of underperformance. So trying to get that balance, right, in terms of the kind of bets you can take on stocks and sectors and, and trying to ensure there aren’t huge biases in in the design. It’s a real, real kind of risk of some portfolios that are heavy in that kind of growth space. You know, that’s, that’s a natural place for ESG investments to end and but, yeah, in terms of like, you know, staple core holdings of investors portfolios, that that’s really kind of what we specialize in, I guess. And, you know, when we’re designing ESG products, we’re looking for those portfolios to, you know, to be fairly balanced, well diversified, but also giving investors the kind of ESG outcomes they expect as well.

 

Fraser Jack 

Yeah. When thinking about the the active management of an ESG fund, or you were looking at any additional Mar type stuff, because of the ESG? Or is it sort of all pretty standard?

 

James Harwood 

Yeah, look, I think if you you go to stock picking manager, almost certainly the the cost of an ESG product is going to be higher than than the standard products. I think that there will be some disruption there, you know, and you’re starting to see ETFs and more more ESG based ETFs being brought to the Australian market at a pretty low fees. So I think there’s for sure there’s some disruption lightly in the in the M er of ESG products. And you would expect that they would really kind of merge towards the standard, you know, active kind of rate and I think probably this really highlights ESG is just becoming a standard and an expectation of investors. So, yeah, there shouldn’t be this, this is is no longer kind of a niche area. It’s a standard expectation. And consequently, I think you will just see the cost of those funds basically becoming the same through time.

 

Fraser Jack 

Yep. Yeah, exactly. I think we’ve passed through that. It being a luxury item these days, to talk to me about investment philosophies. And obviously, as an investment manager, you probably obviously have your your own philosophies and biases around what you do and do and don’t love. Talk to us about how advisors can sort of stay on top of the investment philosophies of investment managers.

 

James Harwood 

Yeah, I think that’s often quite a challenging one for them to, to really, you have to get under the bonnet, and really, you know, look into how managers select securities and, you know, like, say, what, what are their philosophies? I think it’s probably important to try and align client expectations, or, you know, client requirements in terms of shade of green of products. Yeah, on the whole, you know, Russell is a multi manager investor for a lot of our active products. So we combine different managers portfolios to get a well balanced and diversified portfolio. When we do that, we’re also looking at how good those managers are, at ESG. Probably the most important thing, that, that we we look for when we look at managers is we’re looking for ESG to be integrated into the investment process. We don’t want kind of ESG specialists separate from the investment division, I think that’s, that’s on the whole how most firms are moving in that direction now, but you still see, you know, separate ESG teams that aren’t really integrated as much as they could be. With with the investment division, I guess, for advisors, you know, that they’re going to need to rely on some of the investments of some of the, you know, the rating houses like lonsec, and, and Zenith, etc, to, to make those assessments for them. But, you know, I’d encourage them to look under the bonnet as much as they can. And I think I mentioned on the previous session, the reo website, they’re responsible investment association of Australasia. Having the certification from Ria is is really a, you know, a really important step in the right direction if if ESG particularly is what their clients are looking for.

 

Fraser Jack 

Yep. Fantastic. James, I think that’s a fairly common theme. It’s that’s made its way out throughout the whole series that there is a little bit of rolling your sleeves up. And like you said, getting under the button and asking the right questions to have this providers asking the right questions, you know, IP clients, and really just, you know, leaning in towards this, not just taking it on face value. James, thanks so much for coming on the podcast and talking or the whole series and talking about this. What’s the best way that advisors can you know, if they want to roll their sleeves up and get under the bonnet? What’s the best way they can find out about Russell?

 

James Harwood 

Look, I think first things would be to go to the Russell investments website and look at a look at the material that we have on the ETFs simply going to any of their advisor contacts at Russell. They can certainly put you in touch with the you know, the subject matter experts for some more details on our products. And yeah, it would be great to hear from from some of their listeners and speak directly to them, because that’s really the exciting part of designing products. It’s kind of meeting with the end to end investor.

 

Fraser Jack 

Fantastic. Thank you, James. Really appreciate your time.

 

James Harwood 

Thanks, Fraser. I’ve really enjoyed it.

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