Responsible investments have more than quadrupled over the past three years to $622 billion, with 44% of Australia’s assets under management invested through some form of responsible investment strategy, according to the Responsible Investment Association Australasia’s (RIAA) 2017 benchmark report.
RIAA defines responsible investment strategies as negative screening, impact investing, sustainability themed funds and the integration of environmental, social and governance (ESG) considerations.
The 2017 report examines trends from the previous calendar year and finds that investment in ‘core’ responsible investments – including positive and negative screening, sustainability themed investments and impact investments – grew by 26% over the past year to $64.9 billion, representing 4.5% of total assets under management.
“The jump in core responsible investments is the really most significant shift, and what we have found is a number of new products/mandates incorporating screening has increased,” said Simon O’Connor, RIAA CEO. “We’re seeing the incorporation of screening through a lot more mainstream products. That seems to be one of the big trends.”
Screened investments is the largest portion of Core responsible investments, growing to $33.6 billion – up from $24.7 billion in 2015, an increase of 36%. Issues attracting negative screening include the ‘ESG and ethical issues such as tobacco, controversial weapons, alcohol and gambling. The RIAA survey also found significant increases in exclusions focused on human rights and nuclear energy.
“That really reflects this increasing client/consumer demand,” O’Connor said. “There is a strong signal from consumers that their investments avoid some of the more harmful activities. Asset owners are realising that, and asset managers are receiving that message from asset owners. It is our view that we will continue to see more screening embedded in mainstream products, shifting to a point where we almost see commonplace in our mainstream investment products.”
In comparison, the “broad” responsible investment approach grew 8% over the year to $557 billion. ESG integration is the primary ‘broad’ responsible investment approach, and RIAA found that 91 asset managers use broad responsible investment approaches, up from 77 in the 2016 report. Of those 91, RIAA categorises 16 fund managers as leading managers, representing best practice.
“We have pretty much the same number of leading manager implementing ESG integration, but what was interesting to us, we’ve found 91 managers with stated commitments to RI, which is up from 77 the year before,” O’Connor said. “Secondly, the second tier, just below our cut-off criteria, is increasing rapidly. The standard and the disclosure and the reporting by fund managers as to what ESG and RI means to them is stepping up, which is really great. That supports my thesis that we’re moving from talk to action, and that capital increasingly is starting to flow off the basis. It is actually starting to shift in our market and our economy, flowing through to the way our funds are voting, engaging, and investing.”
Overall, there is more disclosure and reporting by fund managers on their responsible investment strategies and policies, O’Connor said.
“As a fund manager, you need to do more than say you’re a PRI signatory, you have to talk through the credentials and answer questions from the super fund as to why you’re holding particular stocks and how ESG is influencing decisions.,” he said.
The RIAA survey also found that in 2016, sustainability themed investments grew “significantly” by 18% to $27.2 billion, and that impact investment and community finance grew by 10% to $4.1 billion, from $3.7 billion in 2015. RIAA noted that the impact investment growth “reflects an increase in the number of dedicated impact investment funds and community finance from both dedicated providers and the big four banks, as well as a larger number of themed bonds being issued in Australia.”
“The point we’re at is moving from [impact investing] being a focus of private wealth and philanthropy, and right now we’re going through the process where impact investing is transforming itself into something that can be considered by institutional investors,” O’Connor said. “Hence, we’re starting to see impact products/structures/deals that are larger.”
O’Connor noted that there has been an increase in dedicated impact theme bonds, highlighting NAB’s Gender Equality Bond, the issuance of certified green bonds, and the July issuance of Australian Catholic University’s Sustainability Bond as examples.
“That will ramp up quite quickly because I think a lot of the institutional market are watching, waiting and putting out their own view of where impact fits,” he said. “It’s been a challenge to work that out, because it’s not an asset class, so deals need to be assessed on a one by one basis, but certainly, our observation in the market is that [there’s] many more people in the market.”
Beyond the category of impact investing, institutional investors are also dedicating thought to how they measure and value their impact as a broader theme.
“There are dedicated impact investment strategies, and we’ve seen quite a substantial step up there,” O’Connor said. “There are more impact products in the market, there are a big number of hemmed bonds that sit within that strategy, but there is also focus on impact, more broadly, sustainability themed investing, and what might have been referred to as ‘positively screened’ investments, more sustainability themed/impact funds, and so I think that is only going to grow. This is the third element around that – very large institutional investors are actively engaged about how they think about the impact of their portfolios and report back to their members on that. Do the Sustainable Development Goals become a useful framework for that? We hear a lot more about the Sustainable Development Goals from our members.”