Looking past the short-term headwind in responsible investing

Ahead of the panel he will be participating in at the Responsible Investment Association Australasia (RIAA) Conference in May, Dugald Higgins, head of responsible investment and sustainability at Zenith Investment Partners, spoke to ifa about responsible investing, the challenges it has faced, and some of the complexities involved.

Higgins noted that following a period of high positive returns, the market, overall, experienced a steep drop that rattled some investors.

“Responsible investing is a segment of the market that has gone through a challenging period on the returns recently, over the last couple of years,” he said.

“I think, probably up until about 2021, the market might have kind of had a bit of a sort of a euphoric detachment from reality when everything was going well, and everything probably came back to earth with a little bit of a thump.

“So, I think it’s always after these inevitable market events, you’ve got to go back and explain to investors and remind them around what the implications are of going down those paths.”

Higgins highlighted some of the confusion clients experienced as a result of the market drop and the need for education to help them better understand how and why these market changes occur.

“Up until 2021, returns for everything, not just sustainable investing, but everything in general, were pretty great. And a lot of the sustainably oriented funds were getting turbocharged returns, quite often because of the sectors that they were leaning into and the way these funds were designed,” he said.

“When you get the inevitable market pullback, they then got turbocharged negative returns as well and nobody likes that. Nobody likes to invest in something, and then suddenly have it go down 40 per cent. That’s just a fact of life.

“But I think it’s getting people to understand well, why did that happen? Is this a failure of the product? Or is this actually just how markets work? And this is normal.”

Higgins added that clients can often misunderstand what responsible investing is, leading to discontentment.

“I think the other one, though, is that a lot of investors don’t really have a great sense of what it means to be a responsible investor in terms of the funds that you pick,” he said.

“I think it’s very easy to think that, well, everything that’s green is good, and everything that’s good is sustainable. And hey, guess what, the market seems to be proving that that delivers a better result.

“It’s very easy to go and think that will just keep on going on forever. But it doesn’t. And so you can get very disillusioned. All of a sudden, you realise it’s just not that simple. Everything comes with compromises, there are no perfect solutions in this space, or in any space.”

Recognising the complexities of RI as a concept in general, Higgins said, like all investing, it is not a one-size-fits-all sector as clients’ values and needs vary widely.

“Let’s face it, investing generally, there is no investment fund of any type anywhere that is suitable for everybody. It just doesn’t work that way. And I think in responsible investing, particularly, that kind of content is doubly important, because these funds can be very nuanced,” he said.

“Some people think that you shouldn’t be investing in fossil fuels, for example, other people think that ‘Well, there are actually some companies with exposure to fossil fuels that yes, while being dirty now, they are trying to transition to a cleaner tomorrow. Therefore, that’s why you have the exposure.’

“Some people will be violently opposed to that. And that’s OK, because it’s all up to the discretion of the individual. One investor’s idea of green is not compatible with another investor’s. So, this concept of no one fund being perfect for everybody is really amplified.”

Moving forward, Higgins said there is an opportunity for advisers to educate their clients and better prepare them for the future.

“What the focus is now, on the back of those challenges having manifested themselves, this is a great opportunity to go back, reset and re-emphasise the elements of that conversation,” he said.

“To say, these are the concessions that you’re going to have to put up with.”

Dugald Higgins will be participating in the panel A Marathon, Not a Sprint: Looking Past Near Term Challenges at the RIAA Conference, held on 1–2 May 2024.