Demand increases for ESG investments; returns do not have to be sacrificed for environmental and social benefit

A lot has occurred in the 12 month period since the last RIAA Responsible Investment Benchmark Report including the devastating Black Summer Bushfires in Australia and global COVID-19 pandemic that has rocked the world. The Black Summer bushfires were a stark reminder of the harsh reality of global warming and illuminated the importance of rapidly decarbonising the Australian and global economies.  COVID-19 and the subsequent economic shocks have demonstrated that exogenous non-financial shocks can have significant impacts on portfolio performance.

Our survey shows that ESG funds outperform non–ESG funds adding to the now well accepted statement that investment returns do not have to be sacrificed for environmental and social benefit. Our findings are in line with multiple recent studies that show that responsibly managed funds have far out performed non-ESG investment strategies since the start of 2020, even taking into account the post bushfire and COVID period, highlighting the fact that ESG strategies are more resilient and better suited to a changing world.

Investment managers are responding through an increased appetite for pursuing “responsible investment” approaches (broadly, strategies that prefer companies with strong ESG strategies and/or performance) with this report’s population of self-declared responsible investors growing from 120 in 2018 to 165 in 2019. This reflects a global trend. Over the last decade, the number and coverage of Assets under Management (AUM) by signatories to the United Nations backed Principles for Responsible Investment (PRI) have grown from 700 to 2,760 and from US$30 trillion to over US$115 trillion, respectively.

Yearly market value growth of responsible investment AUM v total AUM

 

However, despite continued focus on responsible investment and the emerging collective ambition to move the trajectory of our economies onto a more sustainable path the impact on real world outcomes continues to be negative. Our habitats and the diversity of ecosystems which we depend on for survival continue to degrade at an alarming pace, our non-renewable fuels are extracted and burnt at ever increasing rates leading to acute impacts on health and rising temperatures and the resilience of our social fabric is being tested by an ever expanding income inequality gap.

Where there is a mature understanding of the value of opportunities and value at risk from ESG issues there is increasing best practice both from corporates and asset managers and there is a strong strategic response to ESG risks and opportunities which is well communicated and reflected consistently in investment approaches

However this is not the case for the majority of funds. Despite ever more investment managers applying responsible investing approaches, only one quarter can demonstrate practising leading responsible investing and by implication applying ESG strategies rigorously and consistently across the portfolio. Of the 165 investment managers in the Responsible Investment Research Universe, only 44 (27 percent) are applying a leading approach to responsible investment.

What this report highlights is the myriad investment managers who’ve started to capitalise on the potential value organisations can create in society when they approach their operations from a holistic and sustainable perspective. Sustainability or ESG integration does not mean loss of performance. It’s a significant shift in the way we approach business – ensuring we account for all the capital inputs and manage them in a way which will positively impact customers, business and our communities into the future.

With such strong positive results from ESG investments there is really no excuse for investment managers and investors to not just consider but act in making their funds ‘responsible’. Find a good ESG strategy and stick to it.

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2 thoughts on “Demand increases for ESG investments; returns do not have to be sacrificed for environmental and social benefit

  1. A very insightful article. “Of the 165 investment managers in the Responsible Investment Research Universe, only 44 (27 percent) are applying a leading approach to responsible investment.” What is inhibiting the remaining majority from doing this?

    1. Hi Danielle, great question.
      What we find in the market is that many investment managers are performing a ‘check box’ exercise whereby they state they are undertaking an approach to responsible investment as a form of green-washing or to placate demand from institutional and retail investors. However, in reality, they do not have dedicated/trained/skilled team members to undertake ESG/Responsible investing. Or often these team members are not integrated into the core of the business (i.e.- they operate in silos and therefor ESG factors are not being integrated in valuation and asset allocation decisions). Another possible reason could be that investment managers are undertaking great RI practices but they are not providing meaningful disclosures about these aspects of their investment approach publicly.

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