Growth in responsible investment driven by sustainability concerns

Climate change and sustainability-themed investments have grown in popularity as investors look to drive social impact, leading to growth in assets under management. 

Australia’s responsible investment market is continuing its trajectory of growth and now holds a record $1.5 trillion in assets, according to a new report.

The Responsible Investment Benchmark Report 2022 Australia reveals increased interest in responsible investment in 2021, off the back of unprecedented growth in 2020, and much of that growth has been in sustainability-related investments.

Prepared by the Responsible Investment Association Australasia (RIAA), the report investigates the size, growth, depth and performance of the Australian responsible investment market between 1 January and 31 December 2021.

140 investment managers were included in the research and 56 of those provided responses to a survey that contributed to the report’s findings.

The report paints a positive outlook for responsible investment in Australia: Australia’s responsible investment market now represents 43 per cent of total professionally managed funds, up from 40 per cent in 2020.

The report also identifies a record 74 organisations that it labels responsible investment leaders for their delivery of their responsible investment promises, including 17 new investment managers, indicating growing engagement in responsible investment within the Australian market.

What areas are being invested in?

The report notes that there are many different ways for investors to invest responsibly, which exist on a spectrum of how they benefit investors and communities.

It identifies sustainability-themed investments as “the next big trend in Australian responsible investment practice”, with the approach more than doubling from $76 billion in 2020 to $161 billion in 2021.

Fifty-eight per cent of respondents to the survey said they incorporated sustainability-themed investment in their approaches.

Within this category, climate change, waste management and sustainable land management were the top three themes for investors.

ESG integration was the most popular responsible investment approach used by investment managers in 2021, with $752 billion in funds, up from $628 billion in 2020.

The report states that this is in keeping with global trends as investors hold companies to account for the impact their activities have on society and the environment.

Around 20 per cent of surveyed investment managers did not take an ESG approach, instead opting for approaches that they consider more impactful.

Corporate engagement and shareholder action also increased in 2021 to $726 billion in value, while negative/exclusionary screening — excluding certain sectors, companies, activities, regions or issuers from funds based on social or ethical criteria — was used by 77 per cent of survey respondents in their investment approaches.

This approach represents $705 billion in assets as of 2021, a significant increase from $557 billion in 2020.

According to the report, the most frequently negatively screened issues in 2021 were tobacco production, controversial weapons and adult entertainment/pornography. 

There was also an 18 per cent increase in investors excluding companies that don’t pay their fair share of tax.

In contrast, positive screening, or inclusion of sectors, companies and activities based on their positive ESG or sustainability performance, increased by 46 per cent in 2021.

According to the report, investors using this approach looked for positive environmental issues like renewable energy, climate change solutions and preservation of biodiversity.

Norms-based screening, or investment screening according to standards based on international conventions such as UN Convention on Cluster Munitions, fell in popularity as an investment tool in 2021. The report states that this could be because investment managers are “moving beyond achieving minimum standards, and are instead striving to be market leaders”. 

Despite the fall, the appetite for change appears to be growing as investors focus instead on other investment strategies that deliver impact.

Impact investing held reasonably steady at $30 billion in assets under management (AUM) in 2021, compared to $29 billion in 2020. Investors were primarily focused on green, social, climate and sustainability bonds.

See more: Green bonds reach new highs in Australia

Where to now for responsible investing?

According to the report, Australian investors are moving in line with global trends to focus increasingly on ESG.

Respondents surveyed for the report said they were driven by expectations of improved long-term performance and risk mitigation, as well as the desire to benefit the wider community.

But the report notes that negative perceptions of responsible investment continue to exist within the investment community, with investors identifying performance concerns as a key deterrent.

Despite these concerns, responsible investments are “a sound investment choice” according to the report, with these products outperforming investment benchmarks or remaining on par with more traditional funds.

But fewer respondents selected lack of awareness of responsible investment as a deterrent, indicating that the market is more aware of responsible investment options.