Responsible investing flies into the mainstream market

Nearly half of all professionally managed investments made in Australia are now classed as responsible, and they are outperforming mainstream investment funds, a benchmark report has revealed.  

The latest Responsible Investment Association Australia (RIAA) benchmark report found there was $980 billion in assets under management in 2018, a rise of 13 per cent on the previous year. 

Responsible assets now represent 44 per cent of Australia’s total $2.25 trillion in professionally managed assets, up from just 13 per cent in 2013 when responsible investments accounted for $178 billion. 

A responsible approach to investing is defined by RIAA as one that systematically considers environmental, social and corporate governance (ESG) and/or ethical factors across the entire portfolio. 

Simon O’Connor, RIAA CEO, told Pro Bono News the driver of this growth was in part due to an understanding across the finance industry that ESG drove positive investment performance.  

The report found that Australian responsible share funds returned on average 6.43 per cent over five years and 12.39 per cent over 10 years. This compared with respective returns of 5.60 per cent and 8.91 per cent for the S&P/ASX 300 Index.   

“So this is not merely an ethical investing story anymore it’s a story about broader investment risk issues,” O’Connor said. 

He said the other big driver of growth was consumer awareness and interest of where institutions like banks and superannuations were investing their money.

“More and more Australians are expressing a desire to ensure that where they put their money in a bank or where they put their retirement savings in a super fund is in fact aligned with their values and even better than that, actually creating some good in society,” he said.  

“I think that’s more of a chance to do that now, and it seems to just be accelerating over time.”

Despite all of this, he said one of the main challenges that remained for the sector was to dispel the myth that responsible investments failed to deliver a financial return.  

“There is this skepticism in the broader community that if you invest in a way that aligns with your values and invest in a way that supports the areas you’re really passionate about then surely you must get lower investment returns from that,” he said. 

“But that’s a deeply entrenched myth in the market by not only consumers but financial advisors as well that we’re really proactively working to counter.” 

The report found that the dominant responsible investment strategy is ESG integration, representing 45 per cent of assets under management in the country. 

O’Connor defined this type of investment strategy as investors who are looking beyond finance data and are systematically analysing the sustainability issues and risks of every company they invest in.  

“That doesn’t result necessarily in divestment or exclusion. It’s purely about risk as opposed to an ethical or values-based decisions,” he said. 

This is different from funds that negatively screen certain companies in industries like tobacco, mining, gambling, alcohol, pornography or narcotics, which was the second most popular investment strategy at 13 per cent.      

The report found that controversial weapons and tobacco were the most prevalent exclusionary screens among Australian institutional investors. 

O’Connor also said another strategy was for leaders of investment funds to try and shift corporate behaviour internally. 

“They’ll make sure they’re voting their shares really carefully at the company AGM meeting to send out signals that shift corporate behavior towards more sustainable practices,” he said. 

“We’re seeing this actively play out where there is more pressure on large mining, oil and gas companies to improve the way they’re managing climate change risks, and even on some of the big supermarkets to improve their human rights.” 

He said despite the enormous growth of the industry, there were many challenges ahead for the industry such as making sure that the needs of consumers were met.  

“There’s a lot of organisations who have large endowments or funds that they are managing as for-purpose entities or not for profits, and that money has to sit in a bank and be invested in shares or term deposits,” he said.

“And I think it’s really important that as an investment community we’re able to offer investments that really match consumer values and the mission of those organisations.”

He also said the industry had to improve on its accountability to members and clients. 

“What are we achieving, what have we done to improve the climate, have we actually provided more affordable housing, have we provided better working practices for workers in the agricultural supply chains in Australia?” he said. 

He added that policy levers and government regulation to ensure that ESGs and the Sustainable Development Goals were embedded as considerations in the finance sector was an important part of growing the industry. 

“Certainly there’s a lot at the policy level that we can do to really align the finance sector to be helping Australia deliver on our national objectives around the Paris Agreement and the SDGs,” he said. 

This is something that the Sustainable Finance Initiative is currently working on. The project will publish a detailed road map in the middle of next year outlining the policy levers that need to be pulled in order to meet international targets.