Financial services have vital role in a sustainable future, Summit speaker says
Financial services’ role in driving responsible, ESG-driven industry is vital, according to Mercer partner Alexis Cheang.
The long-time proponent of sustainability, who will be speaking at FINSIA Summit 2019 next month, says the existential question the sector faces is: “What is the impact of the businesses we finance?
“Historically, people might have said finance is an enabler of the broad economy. It doesn't pick winners and losers. It's not our job to determine the impact of those businesses. We just provide the oil for the machine.
“More recently, there's really been a shift in expectations to say actually, what we finance does matter and every investment you have has an impact.
“So understanding what those impacts are, both positively and negatively, is important. As an industry we have the opportunity to be future makers, not just future takers.
“In the past, the job of finance has been to make as much money as possible. But that viewpoint is very different in the current environment and people do care about where their returns come from and how their investments impact the wider environment and community.”
During her session, Cheang will explore what the future of responsible investment will look like, focusing on what the investment community can do to make this theme relevant and realistic for retail investors.
“There are some easy things we can do, like stripping the jargon out of what we do. We can also be more transparent about how we're thinking about sustainability and responsible investments in building portfolios for customers,” says Cheang.
For example, it’s important to spell out what it really means if an investor says it is actively considering climate change risk in its portfolio management process
“Does it mean we've decided not to invest in certain assets, for example fossil fuels, if we think their future may be limited? Or it may mean being clear about how are we thinking about climate change as presenting investment opportunities that will lead to a more sustainable future for our customers, with more sustainable returns,” she adds.
Cheang refers to a recent survey published by the Responsible Investment Association of Australasia (RIAA) as evidence there is strong interest among retail investors in investments that either avoid fossil fuels or that actively invest in renewable energy or solutions to climate change, like electric vehicles or low carbon transport.
Labour rights is another emerging theme, says Cheang. “With the advent of the Modern Slavery Act in Australia, there's a lot more information in the public domain about modern slavery and what that means in Australia and in a global context.
“Our customers don't want to invest in slavery, so understanding what we're doing as an industry to avoid supporting modern slavery and being part of the solution to end modern slavery resonates with customers and helps them feel more engaged with their investments.”
Cheang says responsible investment is especially relevant following the Royal Commission into Financial Services.
“There's a real lack of trust in the financial services industry. So we need to regain customer trust and the trust of regulators,” she explains.
Additionally, research by Mercer has shown portfolios that actively consider climate risk and prepare for climate resiliency can perform better than those that don't.
Says Cheang: “We've done a lot of work to model a multi-asset portfolio against different climate change scenarios. In almost all instances the future of investment returns is better under a scenario in which global warming is limited to no more than two degrees Celsius, which is the target under the Paris Agreement.
“So thinking about climate change resiliency and taking steps to make our investment portfolios more climate-aware is in the interest of better long term returns, as well as supporting an environment in which we want to live.”
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