Will private markets lead the impact investment charge?
Observing that there’s “not enough capital” flowing through listed markets at the moment to drive the green transition that’s required, these executives have highlighted the potential of unlisted and private markets as crucial asset classes.
Launched last week, the Responsible Investment Benchmark Report 2023 found Australia’s responsible investment market was valued at $1.3 trillion in 2022, or 36 per cent of the market.
This was a slight decline from 2021 when it comprised 41 per cent of the total market.
Meanwhile, investments into sustainability themes increased substantially in 2022, reaching $235 billion (up from $161 billion in 2021), while the impact investment sector nearly doubled from $30 billion in 2021 to $59 billion in 2022.
Speaking at the launch of the report by the Responsible Investment Association Australasia (RIAA), Leah Willis, head of client relationships at Australian Ethical, shared her observations on what consumers are demanding from the market.
“The growth in sustainability that we see year on year is a reflection of two things: consumer demand and consumers wanting to move towards more positive capital allocations rather than just negative exclusions, and anecdotally, we do hear that,” Willis said.
Looking more closely at impact investments, which goes “one step further” than sustainability-themed investments, she said these investors are evidently trying to correct critical social issues.
“With the transition we have to undertake in the next decade, if not a couple of decades here in Australia, a lot of that impact investment will start to shift to renewables and that transition,” she explained.
“There’s just not enough capital flowing through listed markets at the moment to be able to drive the transition we require. So unlisted assets, venture capital, private equity, private credit, I think, will be the domain of the next decade if we’re ever going to make the transition here in the Australian marketplace.”
Private equity comprised some 1 per cent of RIAA’s certified products in Australia and New Zealand in 2022, according to the latest Responsible Investment Benchmark Report.
In contrast, diversified and multi-assets were the most represented asset class (52 per cent) followed by international equities (18 per cent), Australian equities (10 per cent), fixed income (7 per cent), property (3 per cent) and alternatives (2 per cent).
Simon O’Connor, chief executive at RIAA, agreed with Willis’ sentiment.
“This report looks at all kinds of asset classes, institutional to retail funds, so it’s a bit of a catch-all. It unfortunately doesn’t help us unpack where the [demand] sits,” he said.
“I suspect a lot of that sustainable thematic investing is in private or unlisted markets. We certainly see evidence of a lot more funds in those asset classes coming to market, raising capital in the marketplace.”
Looking ahead, Willis said the Australian economy is at a critical point in the transition in terms of the capital required and changes that companies have to undertake.
“There’s no doubt this whole thematic will remain top of mind and will be key to driving market performance. Being on the right side of that transition and making the right decisions around where to invest and where not to invest is going to be critical not just in the next 12 months but over the next decade,” she said.
She added that she continues to be surprised by portfolio holdings disclosures, which sat at some 50 per cent in 2022 according to the latest RIAA report. This compared to 48 per cent in 2021, which the report attributed to new regulatory requirements.
Interestingly, a percentage of managers partially disclosed fund holdings decreased, while the number of managers disclosing less than 10 or zero fund holdings rose from 31 per cent in 2021 to 38 per cent.
The report explained: “This may be because some managers believe that disclosing their holdings could give their competitors an advantage. Others may be concerned about the reputational risk of being associated with certain companies, while others may simply not see the value of disclosing their holdings.”
Willis added: “If we’re ever going to correct consumer concerns and confidence, it’s about being fully transparent, open and honest about where we’re investing and why. I would like to see more movement on that.”
AUTHOR
Rhea Nath
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