Transparency, action central to building 'consumer love'

2022 has been a rough year for investors across both fixed income and equity markets, but few sectors have had a more challenging time than the funds management industry. The reversal of a multi-decade tailwind of falling bond yields and the acceleration of central bank action has triggered a resurgence of volatility at historic levels.

Naturally, with a backdrop of weaker returns and a more uncertain outlook than at any time in the last decade, inflows have been difficult to come by. Despite this, several groups have successfully continued the recent trend of growth with most having a common trait; great engagement with the end consumer, or ‘customer love’.

Standing out in a sea of red has been the key to driving inflows, whether into superannuation or investment products, with Australian Ethical among the few seeing growth. Highlighted in the group’s financial year result was an increase in customer numbers across both their managed fund and superannuation accounts of 17 per cent for the financial year.

Putting the loss of a significant institutional equities mandate aside, the group managed to garner some $1.2 billion in net flows during the 2022 financial, which management have broadly put down to investors seeking more responsible or sustainable investment solutions. $750 million of this came through their superannuation product and $390 million from the managed fund investments, overcoming what has been a surge in redemptions across the industry in the early stages of 2022.

Given the unique nature of Australian Ethical’s approach, which is guided by their own long-standing Ethical Charter, evidence would suggest that consumers tend to have more comfort in dealing with volatility and staying put when their investments offer transparency and are aligned with their own values.

This was a key focus of the group’s financial report, with a series of data points in particularly exposing the need for greater transparency across the industry. Across their portfolio of listed equity investments the group reports carbon intensity, as measured by CO2 emissions by the companies they own, as being a significant 77 per cent below the benchmark.

Capital flows and the power of engagement remain underappreciated in some parts of the industry, yet both are central to navigating the many challenges that lie ahead. Data produced by the firm shows investors are contributing 5.8 times more capital to renewable and alternative energy solutions and producing 1.8 times more revenue from sustainable operations than the benchmark.

Apart from those companies explicitly excluded from their underlying equity portfolios, four additional divestments were made during the year on ethical grounds, either on the basis of changes in business operations or new information coming to light. The group is also highly active in engagement, with 450 individual companies engagements resulting in 25 per cent committing to positive change within their businesses.

The challenge of engagement vs. divestment remains a vexed one, particularly for those investors of scale, like pension and industry funds, but it is clear both have a role to play. Central to this approach, however, is transparency and how this is reported to the end investor.

This has only become more relevant in an environment where a global energy crisis has increased the attractiveness and relative performance risk for those investing in the traditional energy sector.

Staff Writer