Australia’s responsible investment market in 2021 hit a record $1.54 trillion in assets under management (AUM), up 7.6 per cent from the $1.28 trillion in 2020 according to the 2022 Responsible Investment Association of Australia (RIAA) Australian benchmark survey report released this week. Responsible investing now accounts for 43 per cent of total professionally managed funds and growth in the market has been accelerated by climate change and sustainability tailwinds affecting all parts of economies continues to build momentum.
Climate continues to be a strong theme for both positive and negative screening. An emerging positive screen topic in 2021 was gender diversity and women’s empowerment as well as the emergence of investment themes like biodiversity and nature, which is expected to build momentum over the coming decade.
Key observations about the market across the different styles of responsible investment. There are three major RI approaches attracting most of the AUM. They are ESG integration ($752 billion); corporate engagement and shareholder action ($726 billion); and negative and exclusionary screening ($705 billion).Corporate engagement and shareholder action saw the greatest dollar value increase with an additional $255 billion AUM in 2021.
Some 45 per cent of investment managers are now reporting on both their corporate engagement activities and the outcomes achieved. While funds in sustainability-themed investing more than doubled to $161 billion (from $76 billion in 2020) including $19 billion in sustainability-linked loans.
Sustainability investment themes
The top three investment themes changed extensively from 2020 and they are climate change (renewables, energy efficiency) in first place, followed by waste management, zero waste, and circular economy, and sustainable forestry, land management and agriculture. The latter two categories showing significant increases ($64 billion uplift).
There appears to be significant interest in investing in all facets of natural capital. In 2020 the natural capital category together amounted to only 21 per cent of AUM. In 2021, investment in each of the three natural capital themes has increased, with sustainable forestry, land management and agriculture representing 29 per cent, sustainable water, healthy rivers and oceans 27 per cent and biodiversity and conservation at 26 per cent. Indigenous business and education have also now entered the market as strong themes.
Reporting and performance
Reporting of responsible investment practices has improved, with several investment managers publishing inaugural ‘stewardship,’ ‘responsible investment,’ or ‘impact’ reports, or separate climate policies. Impact or outcomes reporting is gaining significant momentum as companies and funds are being challenged to demonstrate their real world outcomes of their businesses or responsible investment strategies. Data collection and consistency of reporting frameworks continues to be a challenge for the RI industry, but efforts to harmonise reporting as the reporting requirements evolve and expand is challenging.
Responsible investment products continue to outperform the overall market in the multi-asset category on all timeframes as well as the domestic equity category. RIAA-certified products, which distinguish quality, true-to-label responsible investment products that meet the Responsible Investment Standard, typically outperformed benchmarks or remained on par with traditional funds.
Over the long term, RIAA-certified product performance was triple the benchmark for traditional multi-sector growth funds and around double the benchmark for domestic and international equity funds. However private fund performance data is patchy as funds are relatively new, and there are no effective consistent reporting requirements.
Drivers and deterrents
Demand from underlying investors to align investments with their mission and values and institutional investors were the top drivers for investment managers to engage in responsible investment. This supports the assumption that ESG integration is becoming integral to mainstream investment. ESG factors are now widely understood to impact the financial performance of investments and therefore form an essential set of information on which to assess the financial risks and opportunities of an investment.
Expectation of improved long-term performance or risk mitigation grew 18 per cent from 2020 to become the third most popular driver in 2021. This may reflect continued global coverage of the climate crisis and calls for ESG integration into risk management, as events including bushfires, floods and drought increase, not only in frequency but severity and impact on communities.
The prominence of regulatory requirements as a driver is notable, likely due to the introduction of new local and global regulations on climate-related financial risk disclosure such as APRA’s Prudential Practice Guide on Climate Change Financial Risks (CPG 229), the Taskforce for Climate-Related Financial Disclosures recommendations, or the EU Sustainable Finance Disclosure Regulation.
Negative perceptions about responsible investment underperformance as compared to mainstream funds still prevail as it was the main barrier to growth. Whilst there was significant growth in 2021 and the long term trend towards RI and sustainability is clear, 2022 could see a slowdown in AuM growth as ‘greenwashing’ media coverage is causing regulators to step in and weed out funds that are not ‘true to label’. Investors are also becoming more cautious and markets overall have seen a significant value correction in response to rising interest rates and inflation as well as the energy crisis.