The number of Australian Responsible Investors grows, but only one quarter meet the threshold for leading ESG practice
Investors seeking to invest their funds ‘responsibly’ with stronger outcomes for society and the environment, alongside delivering superior financial returns, was put to the ultimate test in 2021.
Launched today, the 20th Responsible Investment Benchmark Report developed by KPMG in partnership with RIAA demonstrates responsible investment (RI) funds are just as resilient as non-RI funds. Approaching investment responsibly does not mean a loss of performance.
The report analysed 198 Australian investment managers and asset owners (to the extent they manage funds internally) who claim to be practicing responsible investing.
The Australian responsible investment (RI) market reached new highs in 2020, increasing to $1,281 billion in 2020 from $983 billion in 2019. The proportion of responsible investment assets under management (AUM) to total managed funds grew from 31 percent to 40 percent in 2020, despite there only being a 2 percent increase in all professionally managed funds in Australia over the same period.
The report reinforces that responsible investment is now mainstream, with 92 percent of the investment managers analysed having a RI policy and 57 percent have at least 85 percent of their AUM covered by an explicit and systematic approach to ESG integration. This is driven by increasing demand for RI from superfunds and institutional investors, changing consumer expectations, the rising materiality of different social and environmental issues and interest from underlying investors in aligning investments with their values or purpose.
Despite an increase in the number of investment managers that employ RI approaches from 165 in 2019 to 198 in 2020, there is still a significant gap between those that claim to be practicing responsible investing and those that have truly embedded these practices through formal policies and accountability commitments.
Based on RIAA’s responsible investment scorecard, only one quarter (54 of 198) of respondents are considered RI leaders, revealing that as the responsible investment landscape strengthens, funds are likely to continue to flow into investments that demonstrate better practice.
With sustainable investment regulation on the rise both here in Australia and globally, investors face increasing risks from legal action if claims made about their responsible investment products are not accurate. The SEC are toughening oversight on ESG claims with the launch of the climate and ESG taskforce which will aim to identify ESG-related misconduct. Europe has introduced the Sustainable Finance Disclosure Regulation which requires investors to disclose how they consider sustainability risks in their investment process. While here in Australia, ASIC have launched a review into greenwashing of ESG and green funds.
As asset managers move to increase the rigour of their ESG investment approaches, impetus will fall on investee companies to continue to improve their approach to sustainability and ESG reporting in order to attract and retain investment.
Investors continue to draw on company produced information to make investment decisions, with Annual Reports, investor reports and sustainability reporting being among the top three sources of information for investment decision making.
The uptake of responsible investment represents a shift in the way we develop corporate strategy, understand investor interests and respond to global events – with the aim to provide long-term positive impacts for investors, the environment and communities.