Ethical Investing: Want to be ethically certified? RIAA CEO Simon O’Connor tells how
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This week in our Ethical Investing series we speak with Responsible Investment Association Australasia (RIAA) CEO Simon O’Connor about what it takes to be certified as ethical and what metrics are important to his organisation and members.
The RIAA is the body that certifies investment products as responsible or ethical investments. Its symbols “provide consumers and industry alike with a quality mark of Australia and New Zealand’s standard for responsible investing products and advice”.
Based on speaking to ethical fund providers, we imagined there was a set of standards that were non-negotiable and had to be met.
But actually the RIAA’s standards are not the issue; it’s the company’s own standards they set on themselves.
“What we expect from all our members is they have processes in place to manage issues beyond just financial risks,” said O’Connor. “We don’t prescribe ‘you must not invest in gambling’. There are lots of different views and processes and consumer preferences.”
He said his organisation was fine if the disclosures “are clear and transparent and they can match consumers’ views on what they want to see in their products”.
“We don’t assess the ESG (environmental, social and governance) metrics of a portfolio. We look at it and make sure there’s no inconsistency with the strategy. So if they say no fossil fuels, Exxon Mobil is not in it.
“We do think that all certified products should have a consideration of ESG as a part of its investment practice.”
Even though there are many different ESG metrics and different industries, consumers have their own preferences.
But O’Connor told Stockhead two issues consistently came up in consumer research as important – climate change and human rights.
He also noted two further things. First, companies with long supply chains had a particular risk.
Second, that Australia now has a modern Slavery Act which careless companies could fall afoul of.
This week, six Australian clothing retailers have been accused of obtaining cotton from China’s Xinjiang province, where ethnic Uyghurs are mistreated and enslaved.
The RIAA is 14 years old and has 150 products certified from equities to debt securities. Much investing analysis occurs without company knowledge until the research is public. But in the RIAA’s case, the companies come to them asking to be certified.
“The reason being is that there’s a growing consumer interest in responsible investing that’s risen in three years and there’s a strong uptake in the market place,” said O’Connor.
“What has come valuable is to get a 3rd party verification that the ethical fund is delivering on what its claiming on. It’s our job to provide that 3rd party endorsement. That it’s true to its label in its strategy.”
Some analyst notes can occur within a matter of minutes after a market announcement. But RIAA certification takes a number of months. It involves a review of their legal documentation, responsible strategy and their entire portfolio.
“We effectively look to verify that the strategy as stated in the IM is actually implemented and has the processes to put it into place,” O’Connor said.
O’Connor also told Stockhead the RIAA runs audits in the first year. It will only renew certification when the certified companies proactively request it.
Additionally, the RIAA run spot audits of at least 5% of its organisations.
He concurred with Betashares CEO Alex Vynokur that “near enough is not good enough” for consumers.
“I think we’re seeing a shift whereby there’s an expectation that funds and products will avoid harm as a minimum,” he said.
“But a product should be seeking to achieve to seek fundamental outcomes. So consumer expectation do create positive outcomes.
“It seems to get consumers more excited, to find savings in a way creating a positive solution. Consumers just expect and want to know they’re avoiding harm.”