A surge of interest in responsible investing from the nation’s asset owners has led to vigorous demands for better environmental, social and governance practices from companies.
The prudential regulator, the corporate watchdog and the Reserve Bank have all recently addressed the need for ESG integration and risk mitigation in response to climate change and this has had an immediate impact, according to Simon O’Connor, head of the Responsible Investment Association of Australasia.
Importantly,new analysis has revealed that corporate engagement is now a dominant strategy used for responsible investment and this is driving changes in corporate behaviour – particularly when it comes to modern slavery and human rights.
O’Connor puts the prominence of modern slavery down to the introduction of the Commonwealth Modern Slavery Act which took effect in January, binding companies with annual revenue of more than $100 million. The law requires a number of asset owners to start reporting on the risk of slavery in their supply chains for their next fiscal year.
“While primarily being driven by the domestic legislation, the super funds are very aware of the risks sitting in ASX-listed companies that relate to modern slavery, labour hire and payment of wages,” he said.
RIAA analysis shows that super funds are now questioning their investment managers on modern slavery and that, in turn, has placed more pressure on companies to report on their exposure in their supply chains.
“We are seeing asset owners talking directly to companies much more frequently rather than just communicating via their fund managers. There is a desire by asset owners to take back that direct interaction, the engagement, as well as the voting rights.”
In his view, Australia is at a critical juncture with issues like climate change and human rights requiring action now to ensure a more sustainable future.
O’Connor’s comments came just as fresh data from the RIAA put Australia’s responsible investment market at almost $1 trillion in 2018, a 13 per cent jump on the previous year. That’s up from just 17 per cent in 2013, when responsible investments accounted for $178 billion.
Almost half of all professionally managed money in Australia is now classed as responsible investment.
O’Connor put the sector’s growth down in part to its consistent out-performance of the benchmark. In the latest report, the RIAA finds Australian equities responsible share funds returned on average 6.43 per cent over five years and 12.39 per cent over 10 years.
That compares with returns of 5.6 per cent and 8.91 per cent respectively for the S&P/ASX 300 index.
“Consideration of environmental, social, governance and ethical factors is becoming the expected minimum standard of good investment practice, with a majority of Australian managers stating a commitment to responsible investment,” said O’Connor.
“The findings of our report refute any misconception that investing responsibly comes at a cost in terms of performance, and contributes to the mounting body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet.
“The exponential growth in responsible investing recognises the integral role it now plays in decision making around fund allocations.”
The growth in responsible investment domestically reflects offshore trends, with global responsible investment assets reaching US$30.7 trillion at the start of 2018, according to data from the Global Sustainable Investment Alliance. The is up 43 per cent on 2016.
The RIAA said the establishment earlier this year of the Australian Sustainable Finance Initiative (ASFI) will provide a framework to guide the finance sector’s role in achieving a more resilient and sustainable economy and result in even stronger uptake of responsible investments.