Global socially responsible investments surged 34 per cent to US$30.7 trillion over the past two years, lifted by Japanese pension funds and investor demand amidst growing concern about climate change risk.

In all the regions except Europe, sustainable investing’s market share has grown. This is particularly the case in Japan, Australia and New Zealand.

Europe remains the biggest region for sustainable investors with about US$12.3 trillion allocated to these strategies, up 11 per cent from 2016, according to Global Sustainable Investment Alliance, an advocacy group that compiles data from sustainable investment funds across the globe.

Yet, sustainable investment funds are losing market share in Europe.

The study found that holdings in sustainable funds made up 49 per cent of professionally managed assets in Europe at the start of 2018, compared with 53 per cent in 2016.

While sustainable investment assets grew at a modest pace, they did not grow as quickly as all of the professionally managed assets in Europe, which hit a record high of €25.2 trillion according to the GSIA study.

The advocacy group said asset managers reported lower sustainable asset values in 2018 because they anticipated a shift to stricter standards and definitions.

“Debate over defining sustainable investing also helped cause the drop-off,” says Simon O’Connor, head of Responsible Investment Association Australasia, a GSIA member.

In March, he added, the European Parliament adopted rules requiring asset managers to use a common reporting standard to disclose how they consider ESG factors and to prevent them from greenwashing, i.e. overstating their commitment to sustainable investing.

“We don’t see so much greenwashing but we see a lot of confusion over what responsible investing entails globally,” O’Connor states.

He predicts the EU proposals would “drive further growth in delivered sustainable investing.

“Proportionately, the drop-off in assets is more related to the fact that the bar is lifting and it’s not enough to put in place negative screens to be included as a responsible investor,” he continues. “That’s great, but it’s not the end game.”

While the vast majority of funds have negative screening, he went on to say, GSIA wants to want to see asset owners report their management of climate-related risks and the integration of ESG into investment policies.

Green shoots

Other markets, while smaller, are growing faster. Japan saw the biggest jump, with assets in sustainable strategies up fourfold to US $2.2 trillion. They now represent 18 per cent of the professionally managed money in the market, up from just 3 per cent two years ago.

The country’s corporate governance code overhaul in the past few years has encouraged focus in this area and the 150.7 trillion yen ($1.4 trillion) Government Pension Investment Fund signed the United Nations-backed Principles for Responsible Investment in 2015.

In the US, sustainable assets grew 38 per cent to US$12.0 trillion at the start of 2018, an increase of 38 per cent.

And in Australia, responsible investment accounted for $866 billion in assets under management in 2018, up 37 per cent from $633 billion in 2016.

“In Australia we have seen a significant stepping up in terms of what it means to be a responsible investor in the last three years, and we are seeing much more activity in terms of embedding a strong system for implementing ESG integration in portfolios,” O’Çonnor argues.

“ESG is no longer erroneously called a non-financial issues and has established itself to be absolutely material to valuations,” he says.

That said, his organisation rates only 13 of the top 50 Aussie super funds as having systematic approach to ESG .

 

 

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.