The data’s in, and despite a covid-induced economic slowdown, responsible investment grew strongly to record funds-under-management pushing to $1.28 trillion. That means responsible investments now make up 40% of Australia’s total managed funds, up from 31% the year prior.
That’s according to the 2021 release of the annual ‘Benchmark Report’ from the Responsible Investment Association of Australasia (RIAA). For sustainable investment obsessives like me the release of the Benchmark Report always feels like Christmas. It’s jam-packed with the latest data points, industry trends, and the approaches of the leading managers.
The report offers a snapshot of 2020, a year where markets crashed on covid fears, and then rebounded more quickly than anybody could’ve anticipated. Amid it all, sustainable investments saw shallower drawdowns and a quicker recovery; and, they disproved the theory that growth in sustainable investments was a fair-weather trend.
The leading approaches to responsible investment taken by investment managers were: ESG integration ($628 billion), negative screening ($557 billion), and corporate engagement and shareholder action ($471 million).
While impact investment had the lowest FUM at $29 billion, it did record the biggest annual gain, a rise of 46%.
While the performance has been impressive, the report concedes that we’re far from being on-track to achieve the targets defined by the Paris Agreement. More capital needs to be deployed if we’re to avoid the worst impacts of climate change, and have a chance of achieving the SDGs.
From the full universe of those investors surveyed, RIAA has highlighted those that scored 75% or above on their proprietary ‘scorecard’, this group is made up of the ‘leaders’, and they’re assessed according to four pillars, as Nicolette Boele explains, head of policy and standards at RIAA.
“It’s those who are aggressively transparent; that’s in terms of policies, in terms of full holdings disclosure. They’re also really collaborative and courageous in their stewardship activity, so they’re not just voting on all the ESG resolutions, but they’re also evidencing what they’re achieving, in terms of engagement, and they’re actually saying to what extent they have achieved or not achieved, what they set out to do.”
The fourth pillar relates to measuring investment against specific outcomes, and this is the area where even the leaders have some work to do.
“They’re also allocating capital towards environmental and social outcomes. But that’s probably the one big pillar where we’re seeing quite a divergence between the leaders and the non- leaders. And it’s still the pillar where the leaders perform the least well.” Nicolette says.
Green Bonds Dominate the Impact Space
Impact investment isn’t easy, and that’s why it makes up the smallest portion of the RI capital stack. Measuring and achieving these clearly defined outcomes, that Nicolette mentions, requires specialist teams, and it operates in an exclusive universe of investable opportunities.
The impact total pushed to $29 billion this year, which is up an impressive 46% from $19.9 billion the year prior. It represents 145 impact products, and in terms of capital allocated, this is heavily dominated by green bonds and fixed income impact strategies.
Affirmative Impact Managers (AIM) are a leading impact bond firm, based in the UK, and they were highlighted by RIAA as being a leader, according to their scorecard result. Kate Temby is a Partner at AIM, she’s based in Melbourne, and she explains the value RIAA plays in the industry, to keep standards high.
“Even though we’ve seen a big growth in funds-under-management, RIAA has shown that we’re still only seeing around a quarter considered as ‘leaders’. That’s why groups like RIAA are so critical, and so important for us as an industry, because they’re helping to ensure the authenticity of what’s coming to market.” Kate says.
“The only region globally last year where we didn’t see a growth in ESG funds was in fact in Europe. This was a result of Sustainable Finance Disclosure Regulation (SFDR) being introduced. SFDR defines legally binding rules around disclosures, and so interestingly, if you are going to put a banner on your fund that says ‘impact’ or ‘ESG’, you have to have a legal support for that in your prospectus. What this is telling us is that it wasn’t the will of asset managers had lessened, it was that the bar of regulation has been set high, and I see that as a real positive.” Kate says.
With strong demand for sustainable options, comes a boost in supply of investment strategies, but inevitably they’re not all going to be of the same high standards as shown by the ‘leaders’. Greenwashing continues to be a challenge, and in 2021, with expectations around terms like ESG and impact being well defined in the sector, and with RIAA having established their own voluntary certification system, it now comes down to broader industry regulation to ensure integrity is maintained.
“It is actually time that we have a bit of help from the regulator.” Nicolette, from RIAA, says. “Over the ditch in New Zealand, the Financial Markets Authority has come out with guidance and a framework based on principles and expectations around substantiating claims, and being clear when making particular claims, as well as putting in any thresholds that might be applied to any inclusions or exclusions. This guides the industry and help them to hold themselves to account for those claims being made. They don’t have that in Australia apart from RIAA’s opt-in responsible investment standard.”
The continued demand for responsible investment options is driven by the current environmental crisis of climate change, and spurred-on by social challenges like Covid19, but of course these investments need to have solid returns as well, if they’re to be sustained.
RIAA reports that responsible funds outperformed both the international share and multi-sector growth funds in 2020, they were on par with an average of Australian funds, but they did underperform compared to the S&P/ASX 300 over three and five years.
On the whole, returns for responsible fund options showed a remarkable sense of resilience over time-frames from 1 year, up to 10 years.