Responsible investment tops $1t

The market for responsible investments in Australia has reached $1.2 trillion in 2020 ($983 billion in 2019), with responsible investment assets growing at 15 times the rate that overall Australian professionally managed investments have grown, according to a study.

The annual ‘Responsible Investment Benchmark Report 2021’, from the Responsible Investment Association Australasia (RIAA) and KPMG showed the proportion of responsible investment assets under management (AUM) to total managed funds grew from 31% to 40% in 2020, despite there only being a 2% increase in all professionally-managed funds in Australia over the same period.

Funds engaged in leading responsible investment practice saw their AUM grow 30% at the expense of the remainder of the market which shrunk 11%.

Nicolette Boele, RIAA executive for policy and standards, said investment managers committed to responsible investment and leading practice were seeing money moving across into their funds, while those with ineffective policies and poor processes are being left behind as the capital moves out.

“The message for investment managers is clear. It’s not good enough to simply claim you’re investing responsibly. If you’re not doing it well, then there’s a high risk of losing business,” Boele said.

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“This dramatic shift of capital is being fuelled by changing consumer expectations, strong financial performance and the rising materiality of different social and environmental issues – from climate change to racial inequity.”

The report shows that just one quarter of investment managers were practising a leading approach to responsible investment, highlighting a continued gap between investment managers that claimed to be practising responsible investing and those that could demonstrate they were. 

“The gap between responsible investment leaders and others is particularly pronounced in the area of stewardship activity, the reporting of outcomes, and specific allocation of capital to target social and environmental outcomes,” Boele said.

“Australian investment managers can benefit from looking to their international counterparts for how they embed and commit to responsible investment: six of the 10 top scoring Responsible Investment Leaders are headquartered offshore.

Mark Spicer, KPMG head of environmental, social and governance (ESG) and responsible investment, said the promises and ESG claims made by investment managers were coming under increased scrutiny.

“With regulation on sustainable investment on the rise both in Australia and globally, investors face increasing risks from legal action if claims made about their responsible investment products are not accurate,” Spicer said.

In 2020, 57% of investment managers had at least 85% of their AUM covered by an explicit and systematic approach to ESG integration, compared to just 41% in 2019.

With a rise in the claims of greenwashing, the report showed that investment managers were improving accountabilities by better evidencing how they were engaging with companies and voting on ESG issues, as well as communicating the real-world outcomes of their investments.

In 2020, 31% reported on both activities and outcomes from corporate engagement and shareholder action, an increase from 21% in 2019.

Boele said the big challenge for the maturing Australian responsible investment market was to improve the evaluation and reporting of sustainability outcomes.

“Increasingly responsible investment is being defined not just by the strategies involved, but by the short and long term social and environmental impacts that investors are targeting and generating through their responsible investment approaches,” Boele said.