Responsible Investment grows, but best practice is still far from reach, the Responsible Investment Benchmark Report 2021 shows.
Responsible Investment – the start of a virtuous circle
The Responsible Investment Benchmark Report 2021, released by the Responsible Investment Association in collaboration with KPMG, analysed 198 Australian Investment Managers who claim to be practicing responsible investing.
The report shows that the Australian responsible investment (RI) market reached new highs in 2020, increasing to $1,281 billion in 2020 from $983 billion in 2019. The proportion of responsible investment AUM to total managed funds grew from 31 percent to 40 percent in 2020, despite there only being a 2 percent increase in all professionally managed funds in Australia over the same period.
Responsible Investment Reporting
As the market continues to mature, it’s increasingly evident that a ‘check the box’ approach to Responsible Investment will no longer suffice. However, of the 198 investment managers in the Responsible Investment research universe, only one quarter (54 of 198) are applying a leading approach to RI.
Of the investment managers in the research universe, almost all have a responsible investment policy (92 percent), however, only 76 percent of those with a policy make it publicly available. Fund holdings is another area demanding increased transparency, with only 36 percent of the investment managers disclosing their full fund holdings, while a further 27 percent disclosed some of their fund holdings.
Investment managers who do not demonstrate the integration and operationalisation of these policies and approaches are now at risk. In April 2021, APRA released additional guidance on consideration of climate risks and opportunities (PDF 875KB) while ASIC are chasing down greenwashing, conducting a review into practices of fund managers.
Those funds that do not truly practice what they preach are putting themselves at risk of a regulatory crackdown.
Performance vs Responsible Investment
The report shows that responsible investment continues to make financial sense. In a year that rocked investment markets in Australia and globally, responsible investment remained resilient. In 2020, responsible investment international share and multi-sector growth funds performed on par with, or better than, the market, even though overall fund performance was down largely due to the impact of COVID-19 on economies worldwide.
Australian investment managers continue to favour ESG integration, negative screening and corporate engagement and shareholder action. With growth in funds under management by all three approaches.
Both leaders and non-leaders on RIAA’s responsible investment scorecard are well practiced in making responsible investment commitments internally or externally. However, when it comes to implementation, responsible investment leaders perform better in managing ESG risks in their financial decisions, stewardship and allocating capital to sustainable outcomes.
Responsible Investment implications for corporates
As more investment managers begin to take on truly integrated and operationalised Responsible Investment practices they are increasingly interested in the understanding the corporates that they invest in (Investee) impact on the environment and society as critical to its ability to create value in the long term. The primary source for ESG strategy and performance information from investees is through engagement, and preferably with the CEO or chair, followed by company produced reporting such as sustainability, annual and investor reporting.
As a result, there is a growing opportunity for investee companies to provide transparent ESG reporting in order to attract this growing pool of capital. Companies’ ESG reporting continues to mature through sustainability frameworks such as the Taskforce on Climate Related Disclosures, Global Reporting Initiative, impact reporting and the Integrated Reporting Framework.
An organisation’s potential to unlock the growing bank of responsible investment capital is enhanced when it has a strong, transparent and strategic approach to sustainability, which is applied to its operations.
Footnote:
- 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 considered 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.
