Responsible Investment – no need to sacrifice returns

The Responsible Investment Association Australasia (RIAA), in conjunction with KPMG, have just released their annual  Responsible Investment Benchmark Report which charts the level of application of responsible investment strategies across Asset Managers in the Australian Market.

For the 18th year of the survey the Responsible Investment[1] (RI) market has grown and the rate of growth continues to accelerate. Assets Under Management (AUM) subject to RI strategies[2] is up 13% since 2017 to $980bn. This represents 44% of total professionally managed AUM, which now sits at $2.24 trillion.

Understanding of the link between Environmental, Social and Governance (ESG) risks and opportunities and economic outperformance continues to strengthen both in the corporate and investor world.

Regulators such as APRA, ASIC, The Reserve Bank and the ACSI have raised warnings and guidance as to the importance of understanding and reporting against ESG and it is clear that ESG risks and opportunities are linked to economic value. Paying lip service to responsible investment will no longer suffice.

Reporting of corporates ESG performance is increasingly linked to impact on the environment and society, or directly to long term value creation through increasingly sophisticated sustainability and Integrated Reporting.

The survey shows this is hitting the mark with the reporting produced by corporates being the primary source of ESG performance information used when making decisions. We are also seeing a number of asset managers and superfunds reporting impact and ESG performance of portfolios directly to members.

Half of asset managers surveyed identified that RI strategies contribute to fund outperformance. This belief is borne out by our analysis that shows that RI funds outperform benchmarks across the majority of time periods.

Australian Prudential Regulation Authority executive Geoff Summerhayes emphasised this point in a recent speech: “Companies that delay or avoid adjusting to new economic realities, no matter how famous or successful, can quickly find themselves on the verge of a Kodak moment,”

However there are still a high proportion of respondents that identified concerns that performance needs to be sacrificed in order to invest under a Responsible Investment strategy.

This concern is not without basis as there are a number of specific impact funds that do prioritise positive environmental and social outcomes above financial returns. This type of RI strategy is not the norm and represents a small (but important) part of the RI universe.2

The survey identifies another area of misalignment between asset manager and members through the application of negative screens. The most frequently adopted screens applied by asset managers are against tobacco and weapons investments whereas data from RIAAs responsible returns investment tool indicates that climate and human rights are the issues that are of greater importance to members.

Given the wide range of RI strategies available there is a clear need for asset managers and superfunds to communicate better with members and customers to match investment approaches adopted to member’s needs and expectations.

Our research also raises concerns about the quality and depth of the ESG integration approaches employed by asset managers. As part of the survey we reviewed disclosures of ESG approaches of 120 asset managers that claim to be apply ESG/RI strategies – only 30% of the asset managers reviewed disclosed sufficient information to allow a good understanding of how they apply ESG integration and the majority provide very little information.

Although the RIAA Benchmark report shows an overall positive story of growth in the responsible investment market in Australia, Australian asset managers still have a way to go to demonstrate better practice and align with the needs of investors and superfund members.

[1] Responsible 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.
[2] The report provides a great overview of the spectrum of RI strategies applied by asset managers
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