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Environmental, Social and Governance (ESG) has become increasingly prominent in investment portfolios as awareness and action around climate change accelerates. This article outlines some aspects of ESG and how investors can directly support local projects through member-owned co-operatives.
Responsible investing through ESG is an opportunity to extend an investment beyond a purely financial transaction. ESG metrics consider both the ethical and economic value of investments and weighing their long-term effect on investments can lead to better analysis and informed decision making.
There is strong evidence to support the higher performance of ESG investments:
- Future Super assert that companies and assets with superior ESG considerations are more likely to outperform other investments in the long term with lower risk profiles (Future Super 2021);
- Analysis from Morningstar suggests that 75% of ESG-screened indexes outperformed their benchmark in 2020, with 88% outperforming over a 5-year period (Institutional Investor 2021);
- Over half of ESG funds outperformed the S&P 500 in early 2021, increasing between 11% and 29.3% in the 5-month analysis period (Whieldon and Clark 2021);
- A recent study by Vanguard and Investment Trends suggests a majority of investors below 40 believe their returns from ESG investments will be improved in the long run (Investment Trends 2021).
Increasing awareness of ESG investments with examples of what they entail will pave the way for greater investment into sectors that have positive social and environmental impact, whilst also delivering favourable returns for your SMSF.
Are you an active investor?
Integrating ESG factors into your decision making shows an active interest in investment outcomes and where your money is going. It’s more than just a financial transaction, it’s the conscious choice to make a difference with your investments.
Co-operatives (or co-ops) are member-owned collectives that are ripe ESG investment opportunities. Many of them focus on climate change and the environment, ethical supply chains and transparent employee processes, and progressive business practices such as board and management diversity.
Co-ops provide a unique opportunity for ‘hands on’ investors, requiring active membership as part of their business model. While active membership might be as simple as subscribing to a newsletter, there are also opportunities for greater involvement by participating in the co-op’s activities and attending its meetings and events.
Could an ESG co-op be the next addition to your SMSF portfolio?
What is a Co-op?
By definition, a co-operative is:
An autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (International Cooperative Alliance n.d.)
In other words, co-ops are enterprises run for and by the members to achieve common goals. This form of governance lends itself to democratic proceedings, with one vote per member regardless of their shareholding. Notably, co-ops are centred around strong social and sustainable values, working towards outcomes and opportunities that are aligned with members’ views and beliefs.
Co-ops tend to present long-term opportunities, with returns that can span over many years. The profit or revenue generated by a co-op can either be reinvested to achieve its objectives or distributed to members, economically perpetuating the enterprise. This differs from an ordinary investment, as share prices don’t increase over time. Instead, equity investors can enjoy returns generated from the activities of the co-op, usually in the form of share dividends.
Distributing co-ops that have had a disclosure statement registered with Fair Trading Australia are able to advertise a return on investment (ROI) for shares in their assets. This gives investors a clear view of the revenue that is expected to be generated to enable a well-informed investment decision.
Co-ops are strongly tied to ESG models through their social and governance structures which enables people to be brought together under a business that works towards community-minded aspirations. Many co-ops are driven by environmental issues and make use of the community focus to spearhead positive change.
Benefits of Renewable Energy Investments
So where does renewable energy fit into ESG? One of the biggest and most pressing global risks is climate change, relating to carbon emissions, air pollution, and energy efficiency and management.
Renewable energy plays a crucial role in climate action by offsetting the carbon dioxide emitting coal and gas electricity generation that still comprises the majority of the Australia’s grid, the National Electricity Market (NEM). For example, a solar photovoltaic (PV) plant of 1kW can offset over 24,000 kg of carbon dioxide emissions over its lifetime, equivalent to taking 20 petrol cars off the road (EPA 2021).
More than that, it’s a moral choice to safeguard our planet for future generations. Investing in renewable energy does not have to mean a compromise on returns, with many renewable energy investments providing superior returns. Renewable energy is a fast-growing field, providing an opportunity to diversify your SMSF portfolio as we transition to a low carbon future. Traditional methods of energy generation are slowing being phased out, with renewable energy expected to comprise the majority of Australia’s energy generation over the coming years.
The synergy between co-op governance models and the positive environmental impact of renewable energy creates an opportunity to build resilient and empowered local communities. Energy-centric co-ops can provide benefits such as public education on energy efficiency and money saving energy practices, offsetting carbon emissions for climate action, and contributing to the creation of local construction jobs.
As with every ESG investment, renewable energy investments come with risks. However, the benefit of a co-op model is that it can take on some of that risk to provide an indication of returns.
About ITP Development
ITP Development (ITPD) are solar farm developers in NSW with the aim of making the world a better place, one solar farm at a time. Our team is passionate about the environment and making positive change through environmentally conscious developments that supply clean and affordable electricity to the residents of NSW. We have partnered with Energy Democracy to support the Central West NSW Co-operative with a solar and battery project in Orange, NSW. The project consists of 4.99MW of solar PV and 4.99MW/5.2MWh of battery energy storage which will support the community of Orange through a reliable source of electricity, create local construction jobs and educate the community of energy efficiency practices. The project is supported by $3.5 million in funding from the NSW Government’s Regional Community Energy Fund.
How can you get involved?
The Central West NSW Co-operative are offering share parcels in the Orange Community Renewable Energy Project (OCREP), currently available for purchase. Each share parcel costs $999, with an expected return of 8 to 12% over the 25-year lifetime of the project.1 The investment opportunity is open to anyone in Australia. If you would like to find out more, please visit www.energydemocracy.net or email [email protected].
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Disclaimer: Please note, this is general advice only and not financial advice. Anyone interested in investing should seek independent financial advice before doing so. Please read the Disclosure Statement. No application for relief under section 741 of the Corporations Act 2001 (Cth) will be sought by the Energy Democracy Central West NSW Co-operative Limited (‘the Co-operative’) in relation to any statement made in this document as the Chapter 6D disclosure provisions do not apply to members’ shares in the Co-operative.
References: EPA. 2021. Greenhouse Gas Equivalencies Calculator. March. Accessed September 28, 2021.
Financial Review. 2021. Robust returns for ESG reward investors. 27 August. Accessed October 21, 2021. https://www.afr.com/companies/energy/robust-returns-for-esg-reward-investors-20210813-p58imz.
Future Super. 2021. How We Invest. Accessed October 21, 2021. https://www.futuresuper.com.au/how-we-invest/.
Institutional Investor. 2021. ESG Index Funds Are. 4 March. Accessed October 21, 2021. https://www.institutionalinvestor.com/article/b1qthg6qk5gtzd/ESG-Index-Funds-Are-Outperforming-Mostly.
International Cooperative Alliance. n.d. Cooperative identity, values & principles. Accessed September 28, 2021. https://www.ica.coop/en/cooperatives/cooperative-identity.
Investment Trends. 2021. “Key highlights from the Vanguard/Investment Trends 2021 SMSF Investor Report.”
IPCC. 2021. “Climate Change 2021: The Physical Science Basis Summary for Policymakers.”
Whieldon, Esther, and Robert Clark. 2021. Most ESG funds outperformed S&P 500 in early 2021 as studies debate why. 16 June. Accessed October 21, 2021. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/most-esg-funds-outperformed-s-p-500-in-early-2021-as-studies-debate-why-64811634.