Responsible investing or best returns? You can have both

Mark Spicer, Director, Sustainability Services
Adrian King, Partner, Head of Sustainability Services Australia

All businesses, and therefore all investments, have an impact on people and the planet, both positive and negative. Responsible investing seeks to minimise the negative effects generated by business and promote positive impacts, ultimately delivering a healthier economy, society and environment and underpinning a stronger investment outcome.

Responsible investing, also known as ethical investing or sustainable investing, is a holistic approach to investing, where social, environmental, corporate governance (ESG) and ethical factors are considered alongside financial performance when making an investment. These factors are taken into account throughout the process of researching, analysing, selecting and monitoring investments, in acknowledgement that they can be critical in understanding the full value of an investment.

The Responsible Investment Association Australasia (RIAA), in conjunction with KPMG, have just released their annual Responsible Investment Benchmark Report detailing industry data on the Australian responsible investment market over the 12 months to 31 December 2017.

The report, as well as our own analysis, KPMG Super Insights Report 2018, show that responsible investment approaches are now business as usual and can outperform mainstream funds.

Historically there has been a perception that responsible investment options underperform the wider market. This benchmark report finds the opposite with responsible investing driving long-term sustainable value and outperforming equivalent funds. Over 55 percent of funds professionally managed in Australia are now using responsible investment strategies.

Our research shows the first point of call by investors for ESG performance information is the companies’ own reporting. This fact, being matched to the continuing focus on the ESG performance of companies by investors, increases the importance of ‘investment grade’ sustainability reporting by corporates.

There are a number of factors driving the increase in responsible investment funds under management, including fund managers becoming increasingly confident in the link between ESG performance and value. Members are increasingly seeking assurance from superfunds that their pension savings are “doing no harm”, and regulators are demanding better disclosure and management of climate risks and other non-financial factors.

Key facts from the report include:

  • As at 31 December 2017, Responsible investments constituted $866 billion in assets under management (AUM), up 39 percent from $622 billion in 2016.
  • Responsible investments now represent around 55 percent of total assets professionally managed in Australia (TAUM) – valued at $1.56 trillion.
  • Funds implementing Core* responsible investment strategies are increasingly delivering strong results and outperforming their equivalent Australian and international share funds and multi-sector growth funds.

What we can see from this continued trend is that Australians don’t want to build their retirement savings and other investments off the back of harmful activities. The investment industry is responding, by providing more investment opportunities that align with these values.

Simon O’Connor, CEO of RIAA, supports this stating, “This is a major milestone to reach with a majority of funds invested in Australia now being invested under commitments to responsible investment. We are now at a stage whereby issues such as climate change, human rights, corporate culture, diversity and a whole range of other important sustainability issues are right at the forefront of consideration by Australia’s finance community.”

The uplift in assets shown in the report was largely due to mainstream investment funds making a switch to incorporate responsible investment, such as: incorporating negative screening, systematically assessing environmental, social and governance (ESG) factors as well as engaging directly on these issues to influence corporate Australia.

Top drivers for growth in funds identified by the benchmark include:

  • retail and Institutional demand for responsible investment products; and
  • ESG integration being shown to have a positive impact on fund performance.

Key detractors include:

  • lack of understanding and lack of advice provided to retail investors; and
  • lack of awareness by members of the public.

There are still significant areas where improvements can be made. As part of the study we undertook a desktop review of 112 self-declared responsible asset managers. We were disappointed to only be able to identify 24 asset managers that demonstrated better practice ESG integration under the criteria set out in the benchmark.

Overall the message is clear, responsible investing generates equivalent or better returns than mainstream investments and demand for products are increasing and investors will increasingly look to the ESG performance of the corporates they invest in.

* Core responsible investment – investment that applies at least one of the following responsible investment strategies: 
• screening of investments – negative, positive or norms-based screening; 
• sustainability themed investing; 
• impact or community investing;
• corporate engagement and shareholder  action. 

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