Attractive economic and social returns the goal, as more investors use their capital for good.
The principles underlying ethical investment are the cornerstone of a successful long-term strategy that can materially reduce risk and improve portfolio returns.
1. Investment returns: Aligning strong investment portfolio performance with fiduciary duty.
Considering all value drivers and embedding fiduciary duty when assessing investment opportunities is critical to driving strong investment-portfolio performance. When discussing private and public equity markets, I enjoy examples of opportunities that do not reach equity markets.
Battery storage is an example of an interesting private-equity investment play with strong prospects. The battery-storage technology is part of a global effort to decarbonise electricity markets with intermittent generation from renewable energy sources. Private investment is bringing down the cost of utility-scale batteries, as seen with solar energy over the past decade, in an effort to address climate change.
This has contributed to a rapid expansion in the pipeline for battery-storage projects in Australia and globally, ensuring sustainable energy development for the future.
2. Long-term investment decisions: Adopting a long-horizon mindset to consider the present and future needs of the investment portfolio.
Most alternative assets are expected to provide ongoing value or services to society over several decades and it is therefore imperative to implement a long-term mindset that ensures assets remain sustainable and resilient in the future.
As the market changes, opportunity and valuations also evolve. Therefore, flexibility is required to assess the relative value of different sub-asset classes.
An example of a long-term asset is healthcare real estate and leasing healthcare property. The attraction is that the leases are long-term, often 10 to 15 years, and are structured with fixed annual increases so you are receiving a stable income return that is growing over time while receiving fairly respectable capital appreciation due to restricted supply.
3. Integration of Environmental, Social and Corporate Governance (ESG): Accessing a wide set of information and identifying opportunities to drive strong results.
Globally, there are attractive ethical investment opportunities being produced by megatrends emerging in the macro environment, including growing demographic trends such as an ageing population.
There is concern that an ageing population can lead to changes in consumption preferences, savings pressures and scarce human capital. This can bring investment opportunities in healthcare and healthcare real estate, which I mentioned earlier as an attractive long-term investment strategy, in addition to consumer goods and services and new technologies supporting healthcare providers.
Another example of a megatrend is environmental issues that may include climatic shifts such as rising sea levels, acute weather conditions, and the move away from carbon-based energy production. This trend brings opportunities such as sustainable agriculture, renewable energy infrastructure, and private equity investments in technology and innovation.
4. Effective stewardship: Actively engaging with companies to exercise ownership rights through voting, and considering both asset-level and system-level management to protect and enhance the value of the investment.
For example, if an infrastructure company was looking at building a new asset, I would enquire about the environmental risk factors and how they are being measured. Areas of due diligence may include how much hazardous waste will be generated, the energy usage involved and the volume of freshwater withdrawn.
I would also engage on topics such as cybersecurity, governance, pay ratios and incentive structures, and whether there are independent board members.
5. Real-world impact: Considering all stakeholders, including shareholders and the environment, to understand impacts and evaluate value creation.
Wilson Asset Management has witnessed a greater focus on value creation and a shift in understanding the impact our investments can have on broader factors such as our society and environment. Value destruction is what economists refer to as the true cost of production, depleting our natural resources and converting them into financial returns.
We want to strive to balance value creation both inside and outside “boundaries” so that our future generations can enjoy the financial and environmental benefits of our investments.
The verdict is out that ethical investing leads to rich opportunities. Integrating an ethical investing mindset and skillset into the investment philosophy and process is a must.