Creating an Australian sustainability fund has been a “rollercoaster ride” for SAM’s Manager of Research, Francis Grey. However, the fund – which began as an idealistic vision – launched in February 2005 and now has A$483 million funds under management (at August 2006). 

Grey and his then-colleague Mark Mills spearheaded the concept in 2000 when they opened the Melbourne office of SAM Australia. It is a subsidiary of the Zurich based SAM Group – an investment group founded in 1995 focusing on the environmental, economic and social criteria in investing. It’s this integrated triumvirate that Grey believes sets SAM apart from other funds. 

“We’re different to what is called ethical investment,” says Grey. “That’s investment which is dictated by a set of values, which may not be shared by everyone. Our focus is on sustainability – people can buy into it no matter where they come from, regardless of their politics or walk of life. It’s about living in a way so that we don’t compromise the future generation’s ability to live as well.  We’ve harnessed that concept for the investment market.”

In Australia, SAM offers two unit trusts: The SAM Sustainable Leaders Australian Fund and the SAM Sustainable Leaders International Fund.

SAM’s Sustainable Leaders Australia Fund follows what they have coined the AuSSI Index. It focuses on the sustainability leaders of the top 200 Australian companies. “We choose the top 20% of companies in each industry sector,” says Grey. “We broadly try to ensure that every industry is represented at its market weight – and in turn each industry represented by a select group of sustainability leading businesses.”

SAM’s Sustainable Leaders International Fund follows the Dow Jones Sustainability Index, developed by SAM in 1999.

Why was the AuSSI created?

In fact, the Dow Jones Sustainability Index was the inspiration for its AuSSI equivalent, the seed of which was planted as far back as 1991. At the time, Grey was working as an economist within the NGO sector. With his friend Mark Mills, who had a background in finance, the pair floated the idea of creating a fund based on environmental performance. “We spent several years trying to convince people it was a good idea, but no one wanted to put money in,” says Grey.

Even when industry superannuation fund HESTA decided to offer their members an environmentally based investment option, they ultimately selected Westpac’s Eco Share Fund. Unlike what Grey and Mills were proposing –a stand alone boutique fund with no track record – the Eco Share Fund had its roots with a major Australian bank. 

When SAM’s Dow Jones Sustainability Index was launched in 1999, Grey and Mills knew they weren’t the only voices in the wilderness. They headed straight to Zurich and convinced the SAM Group to roll out the concept in Australia.

Mills has since moved on to work with a similar London-based fund, Generation Investment, with Grey continuing SAM’s work in Australia.

“Although we started out looking at environmental issues, we soon realised that we had to go for sustainability,” says Grey. “You can’t just save the koalas and leave the villages on the scrap heap of history. You have to save them both – and the economy – at the same time.”

The first investors committed in November 2001, almost 10 years to the day since Mills and Grey discussed the idea, with VicSuper being the first institutional investor to sign up.

“It’s been incredibly hard, just like any start-up,” he admits. “But we’re now hitting a good point where the business has a stable cash flow and six solid investors.”

More sustainability offerings

Grey now has new colleagues at SAM Group Australia and they have plans to expand SAM’s offering in Australia beyond its two current unit trusts. “In Zurich, SAM is a multi-product fund manager – it has a water fund, energy fund and various private equity funds.We’re working to make them available in Australia aswe want to develop other investment products underthe sustainability theme,” he says. “In the meantime,the challenge is to convince more super funds to invest in our existing funds.We’d like to see the fund grow to several billions in a few years. Our model is highly scalable so I don’t see any reason why it wouldn’t.”

The fund’s investment strategy follows a fairly stable formula and members of the AuSSI Index are reviewed annually. In 2006, SAM announced the fund outperformed the mainstream market by 0.7 percentage points, though it has had its period of underperformance as well.

“Our aim is to track the benchmark at the very least,”says Grey. “And as the decades go by – and we might goover or under the benchmark at different points in time - we hope to see modest incremental gain.

“A default outcome of having a sustainability index is that you may influence the decisions of companies.  Highly competitive organisations want to be seen to be doing well. Having an index helps create that dynamic competition with each other which also results in positive sustainable benefits for SAM’s clients, companies, the market, other investors and society.”

Grey says SAM’s investment strategy simply makes sense. “The AuSSI logic is an economic logic,” he says.  “All organisations are dysfunctional by definition.  We’re backing the least dysfunctional ones – but the ones with the greatest ability and willingness to seek genuine improvement – they’re the ones most likely to succeed in the long term.”

www.aussi.net.au