Michael van Niekerk

The responsible investment (RI) movement has gained significant momentum over the last decade with ESG funds alone now having over US$40 trillion under management and projected to grow to US$53 trillion by 2025, representing one third of all invested funds globally.

The United Nation-backed Principles for Responsible Investment (PRI) coordinated and mobilised this movement over the last decade, with over 3800 signatories managing US$121 trillion as at March 2021.  The growth of the RI industry was boosted by the 2015 Paris Climate Agreement and the launch of the United Nation’s Sustainable Development Goals (SDGs), resulting in more asset owners and managers allocating funds to RI products.

The key question is what real world impact has been achieved by the growth of the responsible investment sector. We continue to have pressing social and environmental challenges, including the climate crisis, biodiversity loss, rising pollution levels, poverty, poor physical and mental wellbeing for a rising number of people, and too many children and adults below the national minimum for literacy and numeracy. How has the rise of RI funds helped to address these issues?

Greater focus on greenwashing

Globally there is a greater focus on fund greenwashing, and regulators and authorities are responding by investigating misleading funds and setting disclosure standards.  In Europe, the Sustainable Finance Disclosure Regulation (SFDR) is now requiring funds to be categorised into either Article 6 funds (non-ESG), Article 8 funds (promoting ESG), or Article 9 funds (targeting sustainable investment).  Further, organisations such as the Responsible Investment of Australasia (RIAA) in Australia are certifying funds to ensure they are ‘true to label’.

Most of the responsible investment funds flow have been going into ESG integration approach which is a risk-based approach incorporating environmental, social and governance factors into valuations, but also exclusions or negative screens of ‘sin’ stocks, industries and practices for example tobacco, alcohol, gambling, weapons and human rights abuses and sustainable and thematic or positive screened funds.  However, none of these responsible investment approaches measure the real world impact of their investments.

The development that is required to demonstrate real world outcomes from responsible investment funds is to raise the measurement and reporting of companies’ social and environmental impacts to the same level as financial reporting.

Impact investing, a small but fast-growing area of the responsible investment sector which invests for social and or environment outcomes, is leading the way by incorporating impact measurement and reporting into the investment process. This impact measurement aspect differentiates Impact funds from ESG, exclusionary and thematic/sustainable funds.

The responsible investment sector should evolve to ensure the accusations of greenwashing are unfounded and, more importantly, to shift capital to actually addressing real world social and environmental issues. Measurement and reporting of investment impact is key to enabling this evolution.

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