Moving the dial on responsible investment

Last week, the Responsible Investment Association Australasia released its Annual Benchmark Report on responsible investment 2023 - based on 2022 data from Australian-based investment managers and asset owners.

It is a growing trend in the Australian space and this wire seeks to highlight the key insights from the report you need to be aware of.

What is ‘responsible investment’?

According to the report, 

“Responsible investment, also known as sustainable or ethical investment, is a broad-based approach to investing which factors in people, society and the environment, as well as financial performance and risks, when making and managing investments.”

272 professional investment managers were identified as engaging in responsible investment, managing $3.3 trillion or 93% of all professionally managed assets in Australia. 

But when considering their score on RIAA’s scorecard, only 77 of these managers scored 15 out of 20 to earn the moniker “responsible investor” or >15 out of 20 to be a “responsible investment leader.” 

The leaders demonstrated “an exceptional ability to deliver on its responsible investment promises.” What they did especially well, according to the report was;

“High standards of stewardship and reporting on outcomes set Responsible Investment Leaders apart from non-leaders. More investors are holding investee companies to account through corporate engagement and shareholder action.”

A shift in investment strategies? 

While negative screening (excluding companies with particular characteristics) is the most common approach used, it has decreased by 6% on the 2021 data to $664 bn of assets under management.

Norms-based screening (positive screening to include investments that meet an external norm such as alignment with the Paris Agreement or a social standard such as the UN Declaration of the Rights of Indigenous People) is on the rise, with $255 bn of AUM adopting this approach in 2022 (an increase of 85% on 2021). The report notes this is “something that was previously uncharacteristic of the Australian market.”

As the chart below shows, the range of themes is diverse, ranging from companies that are regarded as the best sustainability performers in their sector or rated as ESG leaders, to more specific themes such as green property, biodiversity, social and community infrastructure, healthcare and education, amongst others.

A smaller section of the responsible investment universe is directed towards impact investment. Impact Investments differ from other forms of sustainable investment by having an explicit aim of generating positive social and/or environmental impact as well as a financial return, with impact being measured. That sector went from $30 bn in 2021 to $59 bn in 2022. Bonds account for around $13 bn (22%) of this sector.

The bottom line: performance

The report concedes the sector had a disappointing 2022 as they typically have lower exposure to the mining and energy sectors which had strong performance in 2022. However over 3-, 5- and 10-year benchmarks, the average performance of the RI products “holds its own against industry benchmarks.”

While the report cites Morgan Stanley data that shows improved performance globally for sustainability investment in the first half of 2023 (see below), we await next year’s RIAA report for an update on the Australian market.

 

Regulatory pressures to improve data quality 

Aside from their choice of investment approaches, responsible investors draw upon a range of data sources for inputs into their investment strategy

• Direct engagement with company management (looking into the whites of their eyes)
• Third-party data providers
• Investee company sustainability information
• Special reports or analysis

Responsible investment is a data-intensive investment approach. All of the above information sources are in addition to the usual financial information sourced from the company and the index used as a benchmark for the fund’s performance. 

And that data is currently undergoing change, not only due to ASIC’s regulatory attention on greenwashing and Treasury’s recently closed consultation on improving climate-related financial disclosures. Emerging international reporting standards for sustainability will change both the range and how companies report data. That means the most commonly used norm - "the most sustainable companies or ESG leaders" - will need to respond to this landscape.