New responsible investment report reveals, financial markets in Australia are embracing ESG and responsible investment, yet rapidly increasing standards risk some being left behind
Announcement posted by Changemakers Media 18 Sep 2023
RIAA's 22nd annual Responsible Investment Benchmark Report has uncovered 93 percent of the professionally managed funds worth $3.3 trillion are managed by investors with public commitments to responsible investment, indicating a transition toward a new state of maturity.
Despite this, increasing standards has led to only 36 percent, or $1.3 trillion of total managed assets, being managed in a way that demonstrates a leading approach to responsible investment.
Estelle Parker, Executive Manager of RIAA emphasised the significance of this shift.
"While this reflects a new level of commitment to responsible investment, we are seeing an industry that is responding to industry and regulatory efforts to tighten standards, with many domestic and international fund managers reporting a more conservative number of responsible investment assets for 2022, a pattern we've been witnessing in other markets overseas. Today, it is simply not sufficient to claim a commitment to responsible investment without the evidence to back it up," she said.
Global markets have moved rapidly to lift expected standards of practice in responsible investment in the last two years and Australia is no exception, from greenwashing guidance to standardisation of ESG product labelling and the development of green taxonomies to formalised stewardship codes.
ESG considerations, across the board, are being hardwired into financial market laws and regulation, including the recent amendments to APRA's superannuation fund trustee guidance.
"These policy efforts and elevating industry standards have started to separate the leaders from the pack, as a sign of a rapidly maturing and professionalising market. In 2023, there were a total of 77 responsible investment organisations attaining the high standards of responsible investment against RIAA's scorecard, up from 74 in the previous year," said Estelle.
"In 2022 it was a challenging investment market for responsible investors, with a period of significant growth for the mining and energy sectors, which are typically sectors responsible investors have a lower exposure to particularly as they move to lower the carbon intensity of their portfolios," said Estelle. This year's report shows some underperformance of Certified Responsible Investment Products over one year, however performance over the medium and long term periods stayed on par with or better than benchmarks, with particularly strong results across managed growth funds.
The report also revealed, a strong uptake in capital flowing to more sustainable investments in 2022 with sustainability-themed investments having grown by 46% to reach $235 billion, including almost $30 billion in sustainability-linked loans and $80 billion targeting climate change areas like renewable energy, human rights, biodiversity and sustainable water management.
"Investors are keen to see action on climate and other sustainability-related issues, and want to make sure that their investee companies are not greenwashing. So they're using their ability to engage and vote to make sure claims are backed up by action. If you're going to make a net zero commitment, this needs to be backed up by a clear and achievable plan," said Estelle.
This year RIAA's Responsible Investment Scorecard was refined, and the standard set higher, to reflect evolving expectations of responsible investment leadership both domestically and internationally.
Not only is the number of investment managers paying attention to responsible investment growing, but they are also getting better at it. The number of fund managers who were able to attain the highest responsible investment standard against RIAA's scorecard reached a record 77, signalling a strengthening of approaches by more market participants.
"This reflects a new level of awareness surrounding responsible investment, whereby nearly all professional investment managers are focused on responsible investment, but that's no longer sufficient to be classed as a leading responsible investor in a world of rapidly lifting standards. What was once considered leading practice in Responsible Investment is now the baseline, with stewardship setting responsible investment leaders apart," said Estelle.
"Investors have an increasing influence on shaping the future of companies, and ensuring there is greater support for initiatives across climate change and human rights. Recent litigation by ASIC, towards companies engaging in greenwashing, is a clear sign that ESG is no longer a tickbox that can be utilised for marketing, as investors now expect transparent and quantifiable action on social and environmental issues," said Estelle.
"While economic uncertainty and market volatility has undoubtedly impacted responsible investing in Australia, our research has uncovered tremendous growth in capital which has been earmarked to support sustainability themes. It's now critical that the government seizes this opportunity to tap this tidal wave of green capital ready to be put to work to drive the low carbon transition. The soon to be released Sustainable Finance strategy by the Treasurer has the potential to both continue to lift standards in responsible investment, while also unlocking capital to help accelerate the transition." said Estelle Parker, Executive Manager, RIAA.
Emma Herd, Partner, Climate change and Sustainability Services, EY Australia, Co-Lead of EY Net Zero Centre, said responsible investment in Australia in 2022 moved into a new phase, one characterised by the ever-increasing expectations for transparency and performance.
"The bar keeps rising and what was considered leadership even a few short years ago is now business as usual. Heightened scrutiny is generating new caution for funds making sustainability claims. But the need to drive more capital into sustainable outcomes is critical if we are to adequately respond to the biggest social and environmental challenges of our time. Growing the pool of funds managed must, and will, continue to accelerate," she said.
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SNAPSHOT OF RESULTS
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Key findings
- 93% of all professionally managed funds in Australia are now managed by investors with a public commitment to responsible investment.
- Australia's responsible investment market is valued at $1.3 trillion in 2022 or 36% of the market made up of those demonstrating a strong and comprehensive approach to responsible investment.
- A new threshold for Responsible Investment Leaders led to 54 fund managers named as Responsible Investment Leaders, and 23 fund managers awarded the new Responsible Investor designation.
- Money is flowing to outcomes for people and planet, as investments into sustainability themes increased substantially in 2022, reaching $235 billion (from $161 billion in 2021).
- The impact investment sector nearly doubled from $30 billion in 2021 to $59 billion in 2022.
- Norms-based screening is soaring in popularity, increasing by 85% to $255 billion as responsible investment managers mature and adhere to global norms like the Paris Agreement and the United Nations Declaration on the Rights of Indigenous Peoples.
- The performance of RIAA certified funds consistently stays on par or better than benchmarks over medium and long term periods, with managed growth funds particularly excelling.
- Natural capital is emerging as an increasingly popular positive screening theme, with 46% of survey respondents screening for biodiversity preservation and conservation, while climate change-related issues continue to be a priority.
- Responsible investors are responding quickly to new sustainability reporting and taxonomy guidance overseas, with many domestic and international fund managers reporting a more conservative number of responsible investment assets for 2022, a sign of an industry and regulatory efforts to tighten standards.
ABOUT RIAA
The Responsible Investment Association Australasia (RIAA) champions responsible investing and a sustainable financial system in Australia and New Zealand. RIAA is dedicated to ensuring capital is aligned with achieving a healthy society, environment and economy. With over 500 members managing more than US$29 trillion in assets globally, RIAA is the largest and most active network of people and organisations engaged in responsible, ethical and impact investing across Australia and New Zealand.
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