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The Responsible Investment Association Australasia (RIAA), in conjunction with KPMG, have released their annual Responsible Investment Benchmark Report which charts the level of application of responsible investment strategies across asset managers in the Australian market.

Responsible Investment – the start of a virtuous circle

The Responsible Investment Benchmark Report Australia 2020 surveyed self-proclaimed responsible investors on their performance for 1 January 2019 – 31 December 2019. The report shows that Australian and multi-sector Responsible Investment1 (RI) funds outperformed the relevant benchmarks over 1, 3, 5 and 10-year time horizons.

The study reveals Australia’s RI market continued its upward trajectory with AUD$1,149 billion in assets under management, a rise of 17 percent from 2018. RI funds now represent 37 percent of Australia’s total AUD$3.155 trillion in professionally managed assets.

Responsible Investment Reporting

As the market continues to mature, it’s increasingly evident that a ‘check the box’ approach to RI will no longer suffice. However, of the 165 investment managers in the RI research universe, only 44 (27 percent) appear to be applying a leading approach to RI. Investors embracing leading RI are being driven by building stronger brand value, improving risk management, fulfilling their fiduciary obligations, and driving real world outcomes through finance.

Of the investment managers in the research universe, it is good to see that the majority (86 percent) now have a RI policy, however only 70 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 claiming to be responsible disclosing their full fund holdings, while a further 28 percent disclosed some of their fund holdings.

This is expected to change significantly as of December 2020, superfunds will be required to make information pertaining to fund portfolio holdings available to trustees under ASIC’s Class Order [CO 14/443]. As a key supplier in the super fund value chain, investment managers will also be required to improve their transparency of holdings.

Regulators such as APRA, ASIC, The Reserve Bank and the ACSI continue to raise warnings and provide guidance on the importance of understanding and reporting against ESG and its clear value-linked risks and opportunities.

The increasing regulatory burden and demand from superfunds and superfund members for increased ESG reporting means that reporting obligations on asset managers are only likely to grow in the future. Investment managers are under increasing pressure from the Principles of Responsible Investing (PRI) and foreign government regulation to publicly and transparently disclose their holdings, investment activities and outcomes.

Performance vs Responsible Investment

Our survey shows that RI funds outperform their benchmarks, adding further weight to the now well accepted statement that investment returns need not be sacrificed for environmental and social benefit. Our findings are in line with multiple recent studies that show that RI funds (and corporates with strong ESG performance) have far outperformed ‘vanilla’ investment strategies. Since the start of 2020 this outperformance seems to have accelerated despite (or maybe because of) the bushfire, flood and disruption of COVID-19 throughout this period - highlighting the fact that RI strategies appear to provide greater resilience and better manage increasing volatility in a changing world.

Australian investment managers continue to favour ESG integration and corporate engagement as their primary RI strategies in constructing their portfolios. However, capital is increasingly moving toward sustainability-themed and impact investments, along with the continued use of approaches such as negative and best-in class/positive screening.

The application of RI strategies by investment managers does not mean loss of performance. Quite the opposite is true: if done well it means the start of a virtuous circle of positive social and environmental outcomes, supported by financial out-performance and investor growth.

Responsible Investment implications for investee companies

The RI investor market increasingly see a company’s impact on the environment and society as critical to its ability to create value in the long term. 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.

The report shows that this approach to improving ESG reporting is of value to company reporters, as two of the top three primary sources of information for investment manager decision-making are company-generated reporting. In addition, it highlights the growing cohort of investment managers who will invest in and capitalise on the potential value companies create in society and the environment. An organisation’s potential to unlock this capital is enhanced when it has a strong strategic approach to sustainability, which is applied to its operations and it reports this approach transparently.


Footnote:

  1. 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.

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