According to the most recent annual report from the Responsible Investment Association Australasia (RIAA), Responsible investment assets form an impressive portion of the country’s investment industry, now representing 47% of Australia’s professionally managed assets, with those investors integrating systematic ESG strategies representing $582 billion. This represents massive growth over a 2 year period, from $153 billion of broad responsible investment assets in the 2014 RIAA benchmark report to $582 billion in the 2016 report.
“In observing the significant and consistent growth in responsible investment we can say without a doubt that this isn’t just a passing trend, but an evolution of the entire sector that is now being driven strongly by consumer demand and engagement with where they invest and bank their life savings,” said Simon O’Connor Chief Executive of RIAA.
“Consumers in ever greater numbers are awakening to the fact that you can invest prudently and profitably without compromising your values which is resulting in the growing retail interest in responsible investment.”
“Years of demonstrated long-term investment benefits to investors, who consider environmental, social and governance (ESG) factors, have quietly shifted around half of Australia’s investment industry to invest responsibly. Now, it is consumer demand targeted at superannuation funds, banks and financial advisers that is creating unstoppable momentum with implications for all parts of the finance sector,” said O’Connor”
Ethical investment performance up to scratch
Pleasingly, alongside this growing demand, the report concludes persuasively that responsible funds are not only about doing good, but are also performing very strongly, with the report finding that responsible Australian Equities Funds and the Responsible Balanced Funds both outperformed their relevant benchmarks over 1, 3, 5 and 10 years.
“There is currently a convergence of factors that are resulting in a very compelling case to invest responsibly, from consumers demanding investments that do no harm through to the evidence that investment value is inextricably tied to ESG factors,” said Mr O’Connor.
“Off the back of these two factors, we’ve seen significant focus in particular around investor responses to climate risk and fossil fuels, an increase in funds excluding entire sectors from portfolios, as well as the emergence of impact investing attracting strong interest as another way to generate financial returns alongside social impact.”
What is responsible investing?
The RIAA defines several different types of responsible investment, as follows:
Broad Responsible Investment
Investment that applies an environment, social and governance (ESG) integration overlay, usually on a mainstream investment management strategy.
Core Responsible Investment
An investment that takes one of the following approaches:
- Screening of investments – negative, positive and norms-based screening
- Sustainability themed investing
- Impact/community investing
- Corporate engagement and shareholder action
Environment, social and governance (ESG) integration
ESG integration involves the systematic and explicit inclusion by investment managers of environmental, social and governance factors into traditional financial analysis and investment decision making based on an acceptance that these factors represent a core driver of both value and risk in companies and assets.
Screening that systematically excludes industry sectors, companies, practices or even, at times, countries based on specific ESG or ethical criteria from a fund or portfolio. This approach is also often referred to as values-based or ethical screening. According to the RIAA, investment funds under management in screening-based investments (including negative, positive and norms-based) have grown by approximately 19% over the past twelve months.
Common criteria used in negative screening include gaming, alcohol, tobacco, weapons, pornography and animal testing.
Positive screening involves screening investment in sectors, companies or projects selected for positive ESG or sustainability performance relative to industry peers in a defined investment universe. It can also refer to best-in-class screening, and involves identifying those companies with superior ESG performance from across all sectors.
Norms-based screening is screening of investments against minimum standards of business practice based on international norms such as those defined by the United Nations (UN). This can include, for example, excluding companies that would contravene the UN Convention on Cluster Munitions, but also screening primarily based on ESG criteria developed through international bodies such as the UNGC (United Nations Global Compact), ILO (International Labour Organisation), UNICEF (United Nations Children’s Fund) and the UNHRC (United Nations Human Rights Council).
Sustainability themed investing
Focuses on investment in themes or assets specifically related to sustainability factors. This commonly refers to funds that invest in clean energy, green technology, sustainable agriculture and forestry, green property, or water technology.
This category also includes multi-strategy portfolios that may contain a variety of asset classes or a combination of these themes. According to the RIAA the funds under management in sustainability-themed investing has grown by 34% over the past 12 months.
Includes targeted investments aimed at solving social or environmental problems whilst also delivering financial returns. Impact investing includes community investing, where capital is specifically directed to traditionally undeserved individuals or communities, or financing that is provided to businesses with a clear social purpose. According to the RIAA impact investing has grown by 41% in terms of funds under management over the past 12 months.