A focus on corporate engagement has boosted the amount of funds that fall under the responsible investment umbrella according to RIAA.
The Responsible Investment Association Australasia’s Responsible Investment Benchmark Report found responsible investments are now worth $1.54 trillion or 43 per cent of the market in Australia.
The research, done in conjunction with consulting firm EY, found the number of investment managers holding companies to account on ESG matters has doubled since 2019 from 21 per cent to 45 per cent.
The result is now $726 billion in assets under management are now being used by fund managers to push for change on ESG issues, an increase of 54 per cent.
Eating cake
The report put further fuel on the argument that ESG investing was done at the expense of performance showing that over a 10-year time horizon, RIAA certified managed growth products averaged a 25.7 per cent return versus 8.8 for Morningstar’s Australia fund multi-sector growth benchmark.
“Responsible investment funds that invested predominantly in international shares were on par with the benchmark over the medium term (three and five-year periods) and underperformed in the short (one-year) and long term (10-years),” the report stated. “While responsible investment funds underperformed over one year, they fared on par or better than both benchmarks in the medium and long term.”
RIAA executive manager Estelle Parker said this year’s study showed responsible investment has hit a tipping point.
“Companies can no longer tick a box by providing cursory ESG metrics,” Parker said. “Investors are expecting real, measurable action towards environmental and social issues.”
Avoiding the greenwash
The success of the responsible investment industry comes amid regulatory attention with ASIC increasing its focus on greenwashing and preventing poor marketing practices from running rampart.
Parker said investment managers have also improved at backing claims about the sustainability of their portfolios, giving further protection from ASIC’s greenwashing scrutiny.
“A record 74 investment managers out of 140 have been identified as responsible investment leaders, who explicitly and systematically consider ESG factors in the allocation of capital, and are decidedly transparent, reporting publicly not just on their activities to improve environmental and social sustainability, but also the outcomes they achieve.”
EY climate change and sustainability services partner Emma Herd said the market has responded to the increase demand and scrutiny of sustainable investing from investors.
“As a wave of mandatory reporting and product disclosure regimes come into force, understanding the current state of the market and the range of approaches being adopted by responsible investors is critical.”
Best interests
While the Quality of Advice Review may impact the process best interest duty is applied, in the meantime there has been debate as to where ESG considerations are a necessary part of a client’s best interest whether they ask for it to be taken into consideration or not.
“While Standard 6 in FASEA’s Code of Ethics is far from prescriptive, the FPA’s understanding is that advice processes should consider “ethical” or “responsible” investments.” Morningstar’s Annika Bradley noted in an op-ed for Professional Planner last year.
“In the wake of the REST case (where a member took the fund to court for failing to protect his savings against climate change), advisers cannot simply dismiss ESG considerations as a passing fad.”
Additionally, research from Investment Trends found responsible investing practices doubled in importance for financial advisers in 2021.
