Responsible and ethical investing in Australia has reached a critical juncture. With almost $1 trillion now allocated across capital markets in accordance with environmental, social, governance and ethical factors, it could be tempting to suggest this once niche style of investing has almost become mainstream.
Certainly, there is plenty to support the view that those charged with the stewardship of Australia’s $2.25 trillion in professionally managed assets are taking new heed of the financial imperatives around responsible investing.
The Responsible Investment Association Australasia’s (RIAA) annual Benchmark Report shows responsible investment growing in 2018 to a record $980 billion, up 13 per cent for the year. To put this in perspective, the latest figure represents a fivefold increase since 2013 when just $178 billion found its way into responsibly managed funds.
It is part of a global phenomenon that has seen responsible investment assets swell to US$31 trillion around the world.
New legislation, a rapidly warming climate, shifting consumer expectations, a hyper-transparent world and the importance of maintaining a social licence, have all become triggers for shifting the operating context of companies and influencing share prices and markets.
These factors are driving many of Australia’s largest investment organisations to demonstrably embed responsible investment approaches within their investing strategy.
Approaches are diverse from screening out harmful industries such as tobacco and controversial weapons; integrating ESG considerations such as how human rights are managed within supply chains; corporate engagement and voting to manage climate risk; and impact investing in social impact bonds to tackle recidivism.
Of significance, responsible investments continue to deliver on financial performance. Again, this year, our report shows outperformance by responsible investment funds across most time horizons for equities and balanced funds. This underscores how these responsible investment approaches are helping to identify and avoid these non-traditional investment risks, whilst also capturing upside investment returns.
From climate change to modern slavery, responsible investment considerations are moving from ‘nice to have’ to being issues of compliance in Australia.
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have both indicated they are moving to supervise regulated financial entities on how they are managing climate change risk after having spent recent months speaking with investors on their current practices.
This is resulting in investors focusing greater effort to understand the climate risks in their portfolios as a matter of compliance - emissions of companies, comparing portfolio companies against their industry peers, assessing the risk of severe weather, storm surges, sea level rises, floods and other physical risks on their property and infrastructure portfolios – and aiming to reduce these risks. As a consequence, we’ll see ever more capital shifting in greater amounts away from poorly managed companies and high emitting industries, and towards companies better positioned to perform well in a cleaner economy.
But responsible investment still has a long way to run to align all capital with achieving a healthy society, environment and economy.
The Australian National Outlook project, recently launched by CSIRO, showed Australia is at risk of falling into a slow decline if no action is taken on its most significant economic, social and environmental challenges. The study highlighted this in stark terms, recognising the bright future and superior economic outcomes for Australia that will come if we tackle these challenges head on.
Similar realisations are occurring internationally and influencing major economies to shift to align the financial services sector with delivering on this stronger and brighter future. From Europe to the UK, China to Canada, sustainable finance roadmaps are setting out to align the financial system policy settings with stronger social and environmental outcomes, to ensure finance is aligned to these goals, and to mobilise private sector capital towards this future.
Australia is also now setting off on this course, with the recent establishment of the Australian Sustainable Finance Initiative (ASFI). Overseen by a Steering Committee of leaders and senior executives of Australia’s major banks, superannuation funds, insurance companies, financial sector peak bodies and academia, ASFI is an unprecedented collaboration to help shape an Australian economy that prioritises human wellbeing, social equity and environmental protection, while underpinning financial system stability, consistent with outcomes as set out by the CSIRO.
A great convergence is underway, with a growing responsible investment sector that is interested in meeting the needs and interests of its clients – knowing that nine in 10 Australians expect their savings and investments to be managed with consideration of their values. This convergence is being recognised and hastened into place globally, as a way of ensuring that financial services can deliver for citizens, both for their retirement savings, as well as contributing to the kind of Australia they want to retire into.