Media Release: Ethical investing leads to more winners
Taking an ethical stance with your investment choices doesn't condemn you to underperformance.
While there’s a long-held misconception that ethical investors pay dearly for the privilege of favouring companies committed to ESG (environmental, social and governance) principles, nothing could be further from the truth. Given that assets invested according to ESG-related strategies reached $30 trillion globally in 2018, Intelligent Investor senior portfolio manager Nathan Bell reminds investors that ethical investing can no longer be dismissed as a short-lived fad.
Here in Australia, Rainmaker research reported a 76 percent annual growth in ESG products (to $1.8 billion) in the three years to 30 June 2020 – almost three times the growth experienced by the rest of Australia’s exchange traded products market.
Bell also reminds investors that they don’t need to make a binary distinction between ESG and returns. “Taking account of environmental, social and governance considerations in an investment process is not only important, it can improve investment outcomes,” said Bell.
ESG linked to returns
There’s now irrefutable evidence of a clear link between ESG investing and more informed investment decisions, plus better risk-adjusted returns in the long run. Bell cites a renowned meta-study of 2,000 academic studies, which reveals a 90 percent non-negative link between the incorporation of ESG factors and corporate finance performance, while 63 percent identified a positive link.
Fast forward to 2020, and the Coronavirus and its aftershocks have put a greater spotlight on the importance of ESG issues, including income inequality, diversity & inclusion, social justice, employee welfare and climate change to name a few.
While some investors assume that ESG-investments are synonymous with sub-par returns, to date these fears, adds Bell have been unsubstantiated. For example, a recent study also reveals that in first quarter of 2020, over 90 percent of sustainable indices out-performed their parent benchmarks.
“What sceptics can take from this data is a clear reminder that if done right, ESG investing can be immensely profitable,” said Bell.
Intelligent Investor has top performing Ethical Share Fund
One ethical fund to out-perform its benchmark is the Intelligent Investor Ethical Share Fund (ASX: INES). Morningstar figures show that with a total return of 7.14 percent, INES is the number one ethical fund compared to 100 similar ethical managed funds benchmarked to the ASX/200 in the 12 months to 30 June 2020.
As the fund manager of INES, Bell attributes the fund’s out-performance, during one of the toughest markets in history, to its heavy focus on owner/manager businesses. He’s adamant that focusing on owner-managed companies, where the person running the business has most of their personal wealth invested – right alongside clients’ savings – is one of the most statistically reliable ways to out-perform the market. Bell attributes the out-performance of technology and healthcare stocks, both at home and abroad, to the founders’ ability to increase their competitive advantages during a downturn.
He says the decision by weaker rivals – worried about refinancing debt and losing customers – to pull back on critical investments and marketing during COVID, has reinforced the market positions of the better run insider-owner businesses. By offering superior service when it matters, adds Bell insider-owner businesses have been instrumental in taking market share off their competitors.
Given the concentration of technology and healthcare stocks – which have performed well during COVID – within ESG portfolios, Bell isn’t surprise at the market attention they’ve attracted in the last six months.
“Ethical funds by nature push investors into high quality businesses, which due to their strong growth trajectory, and robust balance sheets are often economically immune from cycles,” said Bell. “All that pays off in a crisis, which is why those stocks recover the fastest.”
Filtering for better returns
Listed in June 2019, INES is an active ETF designed for investors seeking a diversified basket of Australian companies with growing sustainable profits. The 20-plus stocks held within the fund, including the top five – Frontier Digital Ventures Ltd, Audinate Group Ltd, Seek Ltd, Pinnacle Investment Management and Carsales.com Ltd – are selected due to both their discount to valuation and their low risk of interruption from mounting threats linked to ESG factors.
Bell attributes much of the fund’s out-performance to only selecting from the ASX-300, stocks that pass the ESG filters – including a commitment to addressing environmental, social and governance challenges.
By excluding stocks that don’t pass the ESG filters, only stocks selected by Bell are those that behave in shareholders’ best interests. The fund generally won’t invest in companies that make most of their profits from non-ESG sources, like tobacco, gambling, alcohol and resource companies.
But what’s important to note, adds Bell is that by taking up this [ESG filter] process, investors are not giving up returns.
“When we applied the ESG negative screen to the 420 BUY recommendations made by Intelligent Investor since 2001, the average return from the companies that passed (the ESG screen) was 14.8 percent annualised, compared to 10.1 percent for those that didn’t,” explained Bell.
“Really good businesses aren’t resource companies, they’re the ones that can produce consistent long-term profits, control product pricing and this is why we’ve made such good returns.”
Intelligent Investor senior portfolio manager
Toll free: 1300 880 160
InvestSMART head of funds management
Mobile: 0413 433 640
About Intelligent Investor
Intelligent Investor was founded in 1998 and since then is known for its in depth value investing analysis of ASX listed companies.
In 2014, Intelligent Investor became a part of the InvestSMART family, lending its experience and expertise to even more Australian investors who were seeking the very best share research.
Since then Intelligent Investor has also launched a number of its own funds, including the Intelligent Investor Ethical Share Fund (ASX:INES) www.intelligentinvestor.com.au/INES