Investments that prioritise environmental and social responsibility perform better than their mainstream counterparts in Australia, new research by industry body the Responsible Investment Association Australasia (RIAA) has found.
Launched on Tuesday, the Responsible Investment Benchmark Report 2017 found that 46 per cent, or almost half, of Australia’s assets under management—that’s about A$622 billion—are invested through some type of responsible investment strategy. That’s a four-fold increase from three years ago.
Produced annually and now in its 16th year, the report assessed investment practices by 104 asset managers, superannuation funds, financial advisors, banks, and community investment managers in 2016.
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It applied the term responsible investment to a variety of strategies, including negative and positive screening, impact investing, sustainability-themed funds, and integrating environmental, social, and governance (ESG) factors into decisions.
Responsible investment approaches can be classified as ‘core’ methods which make explicit use of screening or choose sustainability-themed funds; or ‘broad’ strategies which intnegrate ESG factors into decisions more generally.
Responsible investment decoded
ESG Integration: An explicit decision to include environmental, social, and governance factors into financial analysis and investment decisions.
Negative screening: The process of excluding certain sectors such as alcohol and tobacco, weapons, and fossil fuels from investment decisions.
Positive screening: Specifically selecting companies with a positive ESG or sustainability performance.
Sustainability-themed investing: Investing in assets rrelating to themes such as sustainable agriculture, forestry, clean energy, water technology, and green property.
Impact investing: Investments that aim to address social and environmental issues while also generating returns for investors.
Broad responsible investment: Investments that apply ESG integration.
Core responsible investment: Investments that use screening, sustainability-themed investing, impact investing, or engaging shareholders on ESG issues, to find ethical opportunities to channel investment funds.
Core responsible investment funds also outperformed their mainstream counterparts over a three, five, and 10-year period, RIAA found. It calculated average performance by using the asset-weighted returns reported by each responsible investment fund, and a similar methodology to compare the performance of mainstream funds.
Responsible investments are also gaining a greater share of Australia’s total assets under management. Core responsible investments have grown by 26 per cent over the past year to A$64.9 billion; they represent 4.5 per cent of all assets under management, up from just 1.5 per cent a decade ago.
Simon O’Connor, chief executive officer, RIAA, said in a statement that it is “a long outdated myth that financial returns must be sacrificed to invest responsibly or ethically”.
“The performance figures and trends we are now seeing each year are telling the opposite story,” he added.
O’Connor also told Eco-Business that these responsible investment trends send a clear message to the private sector: that capital is starting to choose sustainable, long-term focused businesses.
He explained: “If you’re a business and you’re not thinking about the way you manage your employees, the community within which you operate, the environmental impact of your business, the proper governance or even your impacts through suppliers, then you won’t stack up as comprehensively as your competitors.”
While the report debunks the common misconception that responsible investments don’t deliver competitive financial returns, another key barrier to growth is the lack of public awareness about the availability of responsible options in the banking, superannuation, and investment categories.
If you’re a business and you’re not thinking about the way you manage your employees, the community within which you operate, the environmental impact of your business, the proper governance or even your impacts through suppliers, then you won’t stack up as comprehensively as your competitors.
Simon O’Connor, chief executive officer, Responsible Investment Association Australasia
There is also a shortage of qualified advice and expertise on the issue, the report found.
Thanks to these challenges, “the demand is still well below where we anticipate it will get to”, noted O’Connor, adding that to raise awareness among Australians, RIAA has a Responsible Returns web tool that makes it easy for consumers to find investment options that match their values and interests.
“Initiatives such as this will crack through that barrier and unlock a continuing surge in demand for ethical and responsible investments,” he said.