Responsible investing and ETF opportunities- the best of both worlds

Responsible investing and ETF opportunities

– the best of both worlds

Responsible investing is a strategy which aims to strike a balance between creating financial and sustainable value. This involves implementing an environmental, social and governance overlay on top of ordinary investing principles and financial analysis. The thought of investing for both positive returns and positive environmental outcomes might seem counter intuitive to some but in recent times has been proven to be both a successful and popular strategy.

The 2014 RIAA (Responsible Investment Association Australasia) report highlights that investments in core responsible options grew by 51% year on year to around $25 billion in assets under management whilst asset managers integrating environmental, social and governance practices grew by 13% year on year to reach $153 billion. Importantly the report also dispels the myth that you can’t help the planet and yourself at the same time. When a comparison is made between core responsible investment Australian equities funds and the ASX 300 index, the former is the winner over 1, 3, 5 and 10 years.

Conceptually, responsible investments can be split into both core and broad components. Core responsible investments are composed of specialised managed funds, direct share portfolios managed by advisers and microfinance. Broad responsible investment is the integration of environmental, social and governance issues into the financial analysis and portfolio construction processes used by institutional managers.

Taking this form of investment into an ETF format is the new Russell Australian Responsible Investment ETF (RARI). RARI is based on the custom built, smart beta index (the Russell Australia ESG High Dividend Index) and invests predominantly in the Australian shares and trusts listed on the ASX. The index is weighted towards companies that demonstrate positive ESG characteristics after negatively screening for companies that have a significant involvement in a range of activities deemed inconsistent with widely recognised responsible investment objectives. In addition, the portfolio is weighted to improve expected future income (including franking credits), a trait considered highly desirable by both retirees and SMSF investors alike.

Other key highlights of RARI include:

• Being the only ETF in Australia with an exclusions list based on robust responsible investment criteria, which includes identifying companies with revenue generated from certain activities including the manufacture and/or distribution of tobacco, alcohol, gambling, pornography and armaments, as well as those involved in the production or combustion of more intensive fossil fuels.
• Oversight of the exclusions list by a Responsible Investment Committee, consisting of representatives from Responsible Investment focused institutions and industry bodies who are strong advocates of, and have suitable expertise and background in responsible investing;
• A transparent and well-defined methodology which scores and weights companies in the Index based on two criteria: (1) total ESG rating provided by Sustainalytics [1] and (2) an income score (calculated per the existing Russell Australian High Dividend Index methodology).
• A design that provides a simple, cost effective and transparent means of accessing an ESG enhanced portfolio

RARI is expected to invest in up to 100 listed companies providing a broadly representative portfolio of Australian listed companies and has recently been awarded RIAA certification.

For more information about RARI please visit www.russell.com.au

[1] Sustainalytics is a third-party ESG data provider that delivers a global service of stock-level ESG data to Russell.