Responsible investing – the writing’s on the wall
Around 20 years ago, talking about ethical investing was probably the fastest way to clear out a room.
Today, however, as more Australians become savvy investors, COVID-19 wreaks havoc on world economies and the climate change emergency alarm bells ring louder than ever before, ethical and responsible investing has gone from a ‘nice-to-have’ to a critical and material part of the mainstream finance realm.
Rising market share
As we release the 20th annual Responsible Investment Association Australasia (RIAA) Benchmark Report, it’s clear just how far we have come. Responsible investments in Australia totalled to just over half a billion dollars 20 years ago and today they represent $1,281 billion and are performing largely on par, or better, than the mainstream market.
Moreover, they are fast gaining market share. Amidst broader market stagnation in 2020, responsible investment assets grew at 15 times of the Australian professionally managed investment market. This movement of capital has come at the expense of the remainder of the market, which has seen the value of assets shrink by 11% ($234 billion).
The last 12-months alone have had a powerful impact on ethical investing. Human rights and cultural heritage came into the spotlight via Rio Tinto’s destruction of 46,000 year old cultural sites at Juukan Gorge and international movements such as Black Lives Matter. Meanwhile, COVID-19 decimated industries such as education, tourism and retail, reminding the world that powerful natural forces can change our lives and bring communities and economies to their knees.
Consumers are leading much of the charge, using their collective influence to demand that, at a minimum, the products they invest in are screened for negative impacts on the climate, human rights and animal welfare. And investment managers are responding – somewhat.
There is clearly more work to do. RIAA’s 2021 Benchmark Report shows that just one quarter of investment managers are engaged in ‘leading practice’ responsible investment and just four of the top scoring responsible investment leaders are Australian managers.
The Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report concludes that its member nations’ greenhouse gas reducing policies and programs have failed to halt, or even significantly slow, the relentless rise in global emissions. The Australian Sustainable Finance Initiative's Roadmap calls on the setting of science-based targets that support making net-zero aligned decisions; the IPCC report implores that these targets be brought forward and the actions to achieve them accelerated.
Australian super funds and other fund managers are falling into line and we’re seeing record numbers of investors supporting social and environmental shareholder resolutions on issues as diverse as dismantling racism to overhauling boardroom composition to ensure expertise on climate change.
Responsible investing is going through an important transition, heavily influenced by new regulations in Europe that are resetting expectations of sustainable investment. Between 2018 and 2020, for example, European asset managers had to strip the ESG label off $2 trillion in allocations, as stricter rules were devised on what constitutes a sustainable/responsible investment.
In Australia, ASIC has reviewed the prevalence of greenwashing in the marketplace as many managers have sought to ride the wave of popularity of movements such as impact investing and so-called ‘rainbow washing’ with the Sustainable Development Goals.
All this highlights the importance of standards that minimise greenwashing and that promote investments actively working to create a more sustainable environment, society and economy.
If delivering a healthier planet for our retirement and future generations isn’t enough, there are additional gains for investors who heed the call and commit to responsible investing. Beyond the strong financial returns, they stand to reap greater market share, as those with ineffective policies and poor processes begin to see the money moving out into other funds.
The writing is on the wall. Responsible investing is no longer just a label, or a nice-to-have. Done well, it is crucial to securing the future we all want to live in.
Nicolette Boele, Executive, Policy and Standards for Responsible Investment Association Australasia (RIAA)