RIAA report finds managers increasingly reporting on outcomes of engagement on environmental and social issues.
The amount of Australian assets being managed responsibly reached record levels in 2021, fuelled by a steep increase in the popularity of corporate engagement strategies, according to the Responsible Investment Association Australasia (RIAA).
The value of assets managed using a responsible investing framework rose to A$1.54 trillion (US$1.05 trillion), said the RIAA’s Responsible Investment Benchmark Report 2022, co-authored by consultancy EY. The report also recorded a 54% rise in the amount of assets being managed in strategies prioritising corporate engagement.
The increase in the size of the Australian responsible investment market in 2021 – which now accounts for 43% of the country’s total AUM, up from 40% in 2020 – was supported by strong returns to customers. Investment products certified by the RIAA as meeting its Responsible Investment Standard typically outperformed benchmarks “or remained on par” with traditional funds.
Responsible investment opportunities received a further boost earlier this year with the election of a new government committed to transitioning Australia toward a low-carbon economy in line with an accelerated net zero pathway.
Last month, Australia’s House of Representatives passed the country’s first climate change legislation in more than a decade. which has now been approved by federal parliament. The climate bill includes national targets of cutting emissions by at least 43% by 2030 from 2005 an increased investment in renewable energy projects.
The RIAA report also mentions other factors contributing to growth in responsible investment in Australia, including greater interest in sustainability-themed investments such as climate change, biodiversity, sustainable water, gender and social impact.
Focus on engagement
The leap in the amount of assets invested in corporate engagement strategies – defined as those in which using their power to steer the direction of a company on key issues – means it is now the second most common form of responsible investing in Australia, said the RIAA.
Approximately A$726 billion of AUM is now being used by Australian fund managers to advocate for change by investee firms on ESG issues, compared with A$752 billion allocated to ESG integration and A$705 billion to negative/exclusionary screening.
The RIAA found that 45% of Australian investment managers are reporting on both their engagement activities with investee firms on environmental and social issues and the outcomes achieved, more than double the 2019 figure (21%).
A key supporting trend is the growth of stewardship and active ownership practices, demonstrated by many investors publishing inaugural stewardship, responsible investment, and impact reports.
“This year’s study shows that we’ve hit a tipping point of the responsible investing trend. Companies can no longer tick a box by providing cursory ESG metrics. Investors are expecting real, measurable action towards environmental and social issues,” said Estelle Parker, Executive Manager, Programs at RIAA.
“Investment managers are also getting much better at backing up their claims around the sustainability of their portfolios, as they don’t want to find themselves on the wrong side of tightening greenwashing regulation and scrutiny.”
The report also highlights the growing popularity of sustainability-themed investments, which increased from A$76 billion in 2020 to A$161 billion in 2021, more than doubling in just 12 months. This suggests that this approach could be the next significant trend in Australian responsible investment practice.
Sustainability-themed investments encompass a range of different products and strategies, including sustainability-linked loans, a market that totalled more than A$19 billion over the last 12 months.
Of the survey respondents in 2021, 58% said they incorporated sustainability-themed investing as part of their broader investment strategy, making it the fourth most popular responsible investment approach.
The three most common themes mentioned by survey respondents were climate change (including renewables and energy efficiency), waste reduction and the circular economy, and sustainable forestry, agriculture and land use.
Investment in the three natural capital themes increased from 2020, with sustainable forestry, land management and agriculture representing 29%, sustainable water, healthy rivers and oceans 27% and biodiversity and conservation at 26%.
RIAA-certified products exceeded the average performance of traditional multi-sector growth funds three-fold over 10 years, more than double over five years and almost double over three years.
Certified domestic equity funds delivered performance more than twice the benchmark for domestic shares over 10 years. The RIAA said such metrics should provide long-term investors with further confidence their ability to achieve better financial performance in parallel with better environmental and social outcomes.
The 2022 RIAA report is based on a survey of the investment practices of 140 investment managers in 2021. It identifies 75 firms as ‘Responsible Investment Leaders, meaning they “explicitly and systematically” consider ESG factors in the allocation of capital, and provide transparent public reporting of activities and outcomes related to environmental and social sustainability.