The growing importance of ESG goals and commitments cannot be understated in the finance world. But in Australia, ESG considerations are already deeply embedded across its investment markets according to the Responsible Investment Association Australasia (RIAA).
RIAA’s 22nd annual Responsible Investment Benchmark Report reveals that 93 per cent of the professionally managed funds (worth $3.3trillion) are managed by investors with public commitments to responsible investment, indicating a transition toward a new state of maturity.
Despite these advancements, increasing standards has led to only 36 per cent, or ($1.3trillion) of total managed assets, being managed in a way that demonstrates a leading approach to responsible investment.
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.
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.”
Sustainable investment growth
ESG considerations, across the board in Australia, are being hardwired into financial market laws and regulation, including the recent amendments to APRA’s superannuation fund trustee guidance.
Parker explained: “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.
“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.”
RIAA revealed that its most recent 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 per cent to reach $235billion, including almost $30billion in sustainability-linked loans and $80billion 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,” Parker stressed.
Opportunity to “tap this tidal wave of green capital”
While the number of investment managers paying attention to responsible investment grew, so did signs that 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.
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. However, 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.”
Parker concluded: “While economic uncertainty and market volatility have 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.”
