21 February 2021.

1. A growing and evolving sector

The Responsible Investment Association of Australasia’s (RIAA) annual study, the Responsible Investment Benchmark Report Australia 2020 evidenced that Australia’s responsible investment market grew by 17% in 2019, totalling $1,149 billion in associated assets under management.¹

Responsible investment strategies now cover 37% of Australia’s total $3.155 trillion in professionally managed assets. This growth reflects the changing preferences of consumers, as another RIAA study released earlier this year found that the majority of Australians now expect their savings (87%) and superannuation (86%) to be invested responsibly and ethically.

For the institutional investor, RIAA’s benchmark report outlined that a key driver of market growth was increased demand for alignment to corporate mission statements and Environmental, Social, Governance (ESG) factors. We are in an era where these ESG factors are coming of age and are no longer a ‘tick box’ process, but becoming more integral and systematically embedded in investment and valuation practices, and becoming part of corporate culture.

2. Responsible funds continue to prove their competitive edge to investors

The capacity of responsible funds to withstand a downturn have now been tested in times of uncertainty and turmoil, and they appear to be winning over more and more converts.

According to research conducted by Morningstar, 44% of US sustainable equity funds reported top quartile performance in their respective peer groups.²

The story looks even better for funds investing outside the US. Globally, the MSCI World stock index fell by 14.5% in March, however, 62 per cent of global environmental, social and governance-focused large-cap equity funds outperformed the global tracker. We explore this in more detail in our blog post a harsh wind blows, but responsible funds set sail for calmer waters.

RIAA’s 2020 study also revealed that despite the major market disruption brought on by COVID-19 – which has been the most substantial test for responsible investment to date – responsible funds outperformed the benchmark.

The study revealed that companies which looked after their employees, minimised their impact on the environment, had good governance and protected human rights across supply chains were more likely to deliver superior financial returns to investors.

3. Greater transparency and disclosure requirements

Global requirements for identifying and disclosing continue to grow. The European Commission’s Financial Sustainability Board (FSB) is an international body that monitors and makes recommendations about the global financial system.³ In 2018 it put forward an action plan calling for greater regulation on disclosures relating to sustainable investments and sustainability risks.⁴

In line with the EU’s vision, this year New Zealand became the first country to make climate risk reporting mandatory for banks, asset managers and insurers. Under this new legislation, large financial institutions are required to report annually on governance, risk management and strategies for mitigating climate change impacts.

While Australia is somewhat lagging behind Europe and New Zealand in the evolution of its disclosure requirements, in the Australian responsible investment universe we are seeing a growing sophistication of reporting, with holdings transparency a new data point for 2020.

Investment managers in the Responsible Investment Research Universe are demonstrating a commitment to transparency through their disclosure of fund holdings.

The figure below outlines that 36% of the 165 investment managed included in the Responsible Investment Research Universe (RIAA’s 2020 Benchmark Report) disclose their full fund holdings and 28% disclose some holdings.¹

This reporting is only set to grow. Key suppliers in the super fund value chain including investment managers will soon be required to disclose full holdings as of December 2021 to comply with ASIC’s Class Order [CO 14/443].¹ ⁶ This will see an increase in portfolio holdings disclosure for most superannuation trustees.

It will be interesting to see this space grow further now that has Biden taken office, a champion of climate action and reporting, and the increased pressure on the Morrison Government for this.

Adding to this trend of greater transparency, over the last 10 years advances in technology has seen the rise of citizen journalism. That is, empowered citizens and consumers with portable equipment to film and photograph incidences, actively holding governments and companies to account.

An example of this was when the base metals and energy trading company Trafigura continued to irresponsibly dump toxic waste in Côte d’Ivoire. The company took legal action against journalists attempting to cover this in the media, prompting citizen journalists to step in and expose the company’s irresponsible actions. A trend that is only growing with the increase of technology and social media platforms.

4. Generational shifts and wealth transfer

Generation ‘fix-it’ was a name recently coined for millennials and generation Z who are campaigning for greater responsibility from companies, particularly with regard to the climate crisis. Greta Thunberg has been an inspiration and voice to these generations who, as mentioned in the point previously, are holding companies and governments to account.

According to Morgan Stanley Sustainable Signal, 95% of millennials in the US are interested in responsible and impact investments.⁵

Recent environmental calamities such as the summer bushfires in eastern Australia have acted as a catalyst for demand from retail investors looking for more ethical and responsible investments. Women and the ‘Baby Boomer’ generation retiring are becoming more aware of their investment funds’ holdings and what impact these have. They are choosing to invest their SMSF’s responsibly with fund managers making positive impact.

Millennials and women have proven to be key drivers of ethical and responsible investment and change. Millennials turn 40 this year, meaning that they are growing in seniority in job roles and their level of involvement in corporate decision making and institutional investment strategy.

5. Structural shifts

Some key words to come out of 2020 were those of the ‘green economy,’ and how to foster a post COVID-19 ‘green recovery’, at a time when the pressure for climate action is undeniably at a peak.

We are seeing the rise of new financing instruments being taken up in Europe with interest for these in Australia as outlined in our blog post Green Bonds explained, along with strong growth in the green real estate, green infrastructure and clean technology sectors. All of these aforementioned instruments and green growth sectors are forming part of the new green economy and circular economy trends that are rapidly growing.

These are just five of many reasons we believe ethical investing is here to stay. If you’d like to learn more about how to invest ethically, please contact us here.

References:
¹ https://responsibleinvestment....
² https://www.morningstar.com/ar...
³ https://www.fsb.org/about/
⁴ https://ec.europa.eu/info/publ...
⁵ https://www.morganstanley.com/..
^{6 https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-315mr-asic-extends-relief-from-portfolio-holdings-disclosure/}