Meet Dave: The adviser who thinks far beyond financial returns

About seven years ago, Dave decided to explore the world of ethical and sustainable investment. Initially, it was just so he could better help a handful of clients who wished to exclude fossil fuel producers from their portfolios. But once Dave went down that rabbit hole, there was no turning back. 

"I always thought that my way of making a difference would be after I retire - I'd sell my business and use those funds to support the issues and charities that matter to me," Dave says. 

"The lightbulb moment was realising I didn't have to give up returns, that I didn't have to wait until I was 60, and could use the investments that I have now to make a big difference to the world."

Now, he's a respected voice in the Australian ethical investing landscape, helping to educate other advisers on the importance of responsible investment. He's certified as a responsible investment adviser by the Responsible Investment Association Australasia (RIAA), of which he has been a director since 2019. He's also the co-chair of the RIAA's Financial Adviser Forum.

So where does Dave see opportunities in this burgeoning space? Glad you asked. 

"Clearly, global investment funds have better potential in terms of the investible companies that can give investors pure-play exposure," he says.

"But I'm starting to see interest from clients around that transition piece, looking at fossil fuel companies that are investing in renewables, like Fortescue Metals Group (ASX: FMG), for example. 

"Typically ethical investors have avoided investing in fossil fuels, but where is the tipping point? Are you an investor when 30% of a company is in renewables with a clear plan to transition, or is it 70%, or are you avoiding them altogether?"

In fact, Dave reveals that a number of his clients are investing in carbon-intensive companies - the likes of Santos (ASX: STO), South32 (ASX: S32) and Incitec Pivot (ASX: IPL), in a bid to help drive their transition to greener practices. 

In this Meet the Adviser profile, Dave shares three of his "go-to" funds for client portfolios, as well as three of his own largest portfolio positions. Plus, he thoroughly outlines his personal investment strategy and opens up about his surprisingly not-so-badly performing worst investment. 

And as a side note, if you think Dave's face looks familiar, you're not alone. He's starred in Channel 9's The Investment Series alongside investing greats like Kerr Neilson, and has also been featured in stories on ethical investment in the AFR, SMH, Financial Standard and Money Magazine.

Financial adviser profile

• Name: Dave Rae
• Age: 48
• Current firm: Ethinvest
• Years working as an adviser: 19
• Investment goals: To ensure my family is financially secure and we can comfortably live the life we want. I want to make sure our investments both provide financial returns and generate real positive outcomes for people and the planet.
• Products used: Predominantly managed funds, ETFs and some venture capital. I’ve also invested directly in some start-up businesses where I know and like the founders, have a strong belief in what they are doing - where the purpose of their business has a really clear positive impact - and I feel I can add some value to what they are doing either through my advice or networks.
• Biggest portfolio holding: Giant Leap Fund

Why did you choose this profession and how did you get started as a financial adviser?

Growing up, I was always pretty good with numbers. However, it was only in my later school years that I developed an interest in business. I thought it would be great to run a business one day. But I had no idea what type. Accounting seemed like a good place to start and I landed an accounting undergraduate cadetship at KPMG. I was working in audit but after a while, I became frustrated with looking just at the past. Staying in accounting, I started working with a fund manager and after a couple of years moved into the investment team. I was in the quant team but it didn’t take long to realise staring at spreadsheets all day long wasn’t for me.

I spent a lot of time thinking about what I really wanted to do. I was looking for something that combined my interest in finance and investing with actually helping people. Financial advice seemed the perfect fit - the idea that I could really make a difference in people’s lives. 

While studying for a Graduate Diploma in Financial Planning, I was fortunate to connect with an accounting business in Canberra. They had a small but growing financial advice arm with an adviser who was about to leave. I joined them in 2003 and the managing partner Peter Beames has been an important mentor in my career since then. 

What do you believe makes you different to other advisers in the industry?

About seven years ago I started to take an interest in ethical investing. A couple of things happened around the same time. My fact find had a pretty basic question about whether you had any ESG preferences. Not knowing much about it myself, I didn’t ask this question very well and certainly didn’t explore what it meant. A couple of clients around that time though both had some specific sectors they wanted to exclude from their portfolios. I figured I’d better start to learn about it so I couldn’t competently advise them. 

I joined the Responsible Investment Association Australasia (RIAA) and attended their webinars and conferences. As I started to educate myself, it sparked a real personal interest too. Around that same time, I started thinking about how my own values aligned with my money decisions. I’d been doing charity fundraisers like Movember and Dry July. But I was investing in companies in complete conflict with the goals of these charities. For example, I was raising money for cancer support and research, while investing in tobacco companies.

Since then, I have specialised in providing responsible and ethical investment advice. I’m certainly not unique in this approach, there are advisers who have been doing it a lot longer than I have. But when I think about the personal impact I can make, it goes beyond just my own portfolio or my clients. 

What I have tried to do is help raise awareness and educate other advisers to start having conversations with their clients about ESG issues. Understanding what a client values, not only for their own future but their children and grandchildren, really deepens the relationship.

Can you share a bit about your process for building portfolios and selecting investment products?

Our process is to start by determining a strategic asset allocation that depends on the clients' risk tolerance and goals, then determine what style of portfolio management will best suit the client. 

We can offer a fully tailored portfolio where each investment is chosen specifically for that client, and where there will tend to be a lot of direct holdings in equities, hybrid securities and more, that meet our ethical and financial criteria.

We use research from Stock Doctor, Morningstar, Bond Adviser and Lonsec to triangulate on these. 

A second option is a blended fund portfolio, where clients want less ongoing investment decision making, and to eliminate the need for responding (sometimes quickly) to events such as corporate actions. 

For clients looking for an even more hands-off approach, we offer three managed portfolios where Ethinvest makes the ongoing decisions about portfolio changes. These managed portfolios (SMAs) follow a core/satellite approach in most asset classes, blending a range of ethically screened index ETFs and funds with some direct equities and hybrids.

Can you share some of your “go-to” funds with us?

We use a mix of direct equities and other securities complemented by managed funds in some asset classes. A staple in most of our portfolios, in the 'Alternatives' space is the Partners Group Global Value Fund - a highly diversified, predominantly infrastructure and private equity Fund run out of Europe but with assets all over the world. The Fund is committed to responsible investment and to managing assets that proactively create a lasting positive impact. 

The Brookfield Global Transition Fund (wholesale investors only) invests in the global transition to a net-zero carbon economy. The fund is pursuing three themes: The transformation of carbon-intensive businesses to lower carbon density; clean energy infrastructure; and sustainable solutions that drive a circular economy.

Another, in international equities, is the Pengana WHEB Sustainable Impact Fund. WHEB is a leader in sustainable investing and focuses on the opportunities created by the transition to more sustainable, resource-efficient and energy efficient economies.

Managed Fund

Pengana WHEB Sustainable Impact Fund

Global Shares

View

How do you discover new managers and investment opportunities in a market saturated with products and issuers? What makes a manager stand out?

Fund managers find us. There's no shortage of contact from BDMs sharing new products. But a manager with a great track record is what we are looking for. Those with a really strong ESG and/or ethical or impact framework guiding their decision making alongside a robust process. 

In our experience, it's pretty easy to tell the difference between a manager or fund that takes ESG factors seriously and those that don't. 

Transparency of holdings is an absolute must for ethical investors too, so if a fund manager is not willing to publicly disclose their holdings, that's a big red flag.

A pitch deck from a fund manager arrives in your inbox, what happens next?

We have an APL committee that meets monthly to discuss additions and deletions from the APL. A member of that committee (made up of advisers) would take an initial look at some strict parameters around the length of experience, Lonsec rating etc then either propose for further DD and discussion or not. 

We can also draw on the huge experience of our Australian Impact Investments (Aii) team (a subsidiary of Ethinvest), which looks deeply into the ethical and impact side of things, and provide a rating about whether the investment would rate as a Harm, Avoid Harm, Benefit or Contribute to Solutions from an impact perspective

How would you describe your personal investment strategy?

My personal strategy goes beyond just thinking about financial returns. A few years ago I heard Kylie Charlton, Managing Director of Aii say if you have two investments with identical potential returns, but one has a positive social or environmental impact as well – why wouldn’t you choose the investment with a positive impact? That really struck a chord with me.

When I think about investing, I use a framework that was developed by the Impact Management Project, the ABC of Impact. Before getting into it, I’ll explain what impact means. According to the Global Impact Investing Network (GIIN), “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

You can think about investments that align with one of these four areas:

• Does (or may) cause harm.
• Act to avoid harm - no involvement in activities harming people or the planet. 
• Benefit stakeholders – have a positive effect on society eg. health or education.
• Contribute to Solutions – those addressing big social or environmental problems.

Over the last few years, my key objective has been to move my personal portfolio further toward the right of the image above - more investments that "Benefit" or "Contribute to Solutions" (my top three holdings will give some more insight into the types of companies this means I’m investing in). It’s an ongoing process and it's far from perfect. But continual improvement is what I strive for.

Now just to be clear, my personal strategy involves seeking good financial returns. I’ve got a family, a mortgage, future plans that require a return on investment to achieve these. So this isn’t about concessional or below-market returns. Research is clearly showing you don’t have to give up returns to invest this way.

What are the top three holdings, in percentage terms, in your personal portfolio and can you tell me a bit about why you hold each of these positions?

1. Giant Leap Fund

In 2016 I read an article about the Impact Investment Group and its approach to investing. I was intrigued by the idea of a fund that invested in purpose-driven startup businesses. I’d never invested in venture capital before but was interested in providing fresh capital to amazing founders. I was blown away by the authenticity of the team, it was a refreshing approach in the world of investment.

Giant Leap is a venture capital fund that invests to achieve a typical return alongside measurable impact. Potential investments have to meet both a financial and impact hurdle. They invest across three themes: sustainable living, health and wellbeing and empowering people. 

This includes companies like Who Gives a Crap, which makes 100% recycled toilet paper and donates 50% of its profits to build toilets in the developing world. To date, it's donated over $10 million. Last year, they raised capital for the first time and attracted leading venture capital funds alongside impact investors. 

Another example is Goterra, which is a modular waste management system using insects to process food and organic waste, converting it to sustainable protein and fertilizer. A third of the food produced globally goes to waste, most to landfills, accounting for 8% of greenhouse gas emissions.

2. Federation Alternative Investments

This is a diversified investment fund focused on three areas of expertise:

• Renewable energy: Including wind, solar, hydro, and storage.
• Real estate: Across childcare, education, disability housing and healthcare.
• Private equity: Mainly in healthcare, technology and financials.

One of their investments is in Sendle, Australia’s first 100% carbon neutral door to door parcel delivery service. Recently for Earth Day, they asked the world to “Think before you ship”, showing the real cost of online shopping addiction. Imagine that – a shipping company asking if you really should be shipping as much!

3. Inspire Australian Equities Fund

This fund has 10 Impact Focus areas they invest in. These include areas such as education, renewable energy, healthcare and financial inclusion. Being an impact fund in public equities is more challenging than in private markets. One way Inspire is able to meet the impact definition is by providing fresh capital via capital raises and IPOs. 

They also actively engage with companies and support the scaling of those with deep impact as their core business. Inspire is one of only a small number of impact funds that have been certified by the Responsible Investment Association Australasia which applies a tougher hurdle for impact funds.

One of their largest holdings is Genex Power (ASX: GNX), which is developing a portfolio of renewable energy generation and storage projects across Australia. Inspire recently participated in an equity raise to fund a 50MW Battery Energy Storage System in Queensland. 

Could you tell me about your worst investment? How did you deal with this falling position or fund?

This might sound a little strange but my worst investment was actually very successful financially. Without giving it away, it was Australia’s largest poker machine business. I invested at the IPO and the returns were pretty impressive. But over the years I saw so many stories of poker machine addiction and the lives that have been ruined. Stories of people stealing from their employer or families, losing their homes all due to poker machines. 

The proliferation of poker machines in Australia is a national disgrace. When the company recently attempted a takeover of an online casino gambling company, a type of gambling currently banned in Australia – I was very happy to have long ago sold my shares. That is not the type of business that shares my values.

What conversations are you most frequently having right now with clients? And what is your answer to these questions?

The question is, "How can align my money more closely with my values?" And the conversation piece is around the issues that really matter to each client. According to RIAA’s “From Values to Riches Report 2022", four out of five Australians expect their bank account and super to be invested responsibly and ethically. So clients want to explore this.

The topics that keep coming up in recent years: bushfires/floods/extreme heat and the contribution of fossil fuels to a changing climate, the inequality in regard to those who are most affected. The war in Ukraine, the effect on energy prices and the opportunity that provides for a more sustainable future. The COP conferences, IPCC reports and complete lack of federal government leadership and ambition on climate action are regularly discussed. 

Most clients who have already bought or are about to buy an EV care about sustainability. Plastic waste has become a prominent issue over the last few years, which raises the question – are you investing in companies causing the problem or helping create the solution? People are already looking to align their work, spending, and giving with their values. Where they invest their money is equally important.

The follow-up question is, "Where do invest my capital to make the world a better place?" The multitude of problems the world faces also creates many opportunities for investors. At Ethinvest we have deep experience to help our clients create a portfolio they can be proud of.

What are the most common mistakes you see in the portfolios that you inherit and how do you go about fixing them?

Often a new client has never been asked about what their ESG or ethical preferences are. 

Another finding in the “From Values to Riches Report 2022” was that around half of Australians expect financial advisers to provide responsible investment recommendations. But clearly, it is still not being well explored.

In one particular client meeting, I went through the ESG questionnaire to find out what issues were important. When I asked, the client said they definitely wouldn’t want to invest in fossil fuels. Yet when I looked through their existing portfolio with them, they were invested in a collection of funds with heavy exposure to fossil fuels.  

If you could change one thing about the industry so that it can better serve Australians, what would that be?

It would be the finance sector stepping up and playing a bigger role in creating a more sustainable future. In 2020, the Australian Sustainable Finance Roadmap was released. It’s a plan to align the financial system with a sustainable, resilient, and prosperous future for all Australians. Two recommendations I want to highlight that could be a huge catalyst for change:

1. The financial system enables Australians to make financial decisions based on their values and sustainability preferences. This includes financial advisers, super funds, and platforms. This would be massive, particularly, if every investor was asked about their preferences simply and clearly before investing any money.
2. Ensuring sustainable finance education is embedded across all sectors of the industry in both new and existing training and curriculums and ongoing development.  

Can you share a personal passion or ambition you have for your future?

I love getting out on my mountain bike for a long ride. For fitness and health, but also being out in nature. I enjoy the solitude of a couple of hours off-road, with no cars to deal with. 

We are spoilt in Canberra with fantastic single tracks at places like Stromlo, Majura or Kowen Forest. There is a vast network of fire roads that link up Canberra’s many nature parks. And we have the Centenary Trail, a 145km loop around Canberra that combines purpose-built trails, bike paths, fire roads and horse tracks. 

I can ride out my driveway and hardly touch a piece of the road pretty much as far as my legs can take me. I used to do some racing, for fun - not for the results. This includes the famous 24-hour races at Stromlo (as part of a team). A lap at 2am is pretty tough, but riding across the top of Stromlo, and looking out over Canberra as the sun comes up, is also pretty magical.    

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