Responsible investment market nears $1 trillion in funds
Australia's responsible investment market hit $980 billion in funds under management last year, jumping 13% from 2017.
The number of assets that meet responsible investment principals in Australia now make up 44% of Australia's $2.25 trillion market – a jump of more than 400% from 5 years ago, according to a new report by the Responsible Investment Association of Australasia (RIAA).
Far from being hamstrung, it found that responsible investment funds outperform mainstream funds over most time frames and asset classes.
Australian equities responsible share funds saw average returns of 6.43% over 5 years, compared to a 5.6% return for the S&P/ASX 300 index, the data showed. Over a 10-year time frame, responsible Australian equities funds delivered returns of 12.39%, beating the ASX300, which returned 8.91%.
"The findings of our report refute any misconception that investing responsibly comes at a cost in terms of performance, and contributes to the mounting body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet," said RIAA chief executive Simon O'Connor.
Performance of responsible investment funds compared to mainstream funds
|Australian share funds||1 year||3 year||5 year||10 year|
|Average responsible investment fund||-1.25||5.70%||6.43%||12.39%|
|Morningstar: Australia Fund Equity Large Blend||-5.49%||4.87%||4.42%||7.95%|
|S&P/ASX 300 Total Return||-3.06%||6.65%||5.60%||8.91%|
Source: RIAA, 02 July 2019
|International share funds||1 year||3 year||5 year||10 year|
|Average responsible investment fund||-0.03%||11.18%||9.48%||9.50%|
|Morningstar: Equity World Large Blend||-0.68%||6.37%||8.42%||8.97%|
|MSCI World Ex Australia NR AUD||1.52%||7.49%||9.81%||9.57%|
Source: RIAA, 02 July 2019
While responsible investing trends have been slower to pick up in Australia compared to other countries, such as the United States, a bigger spotlight on climate change as well as findings from the financial services royal commission have propelled the topic into the public eye in recent years.
Although terms differ between experts, ethical or responsible investing essentially means to choose companies that avoid certain "unethical practices" based on a person's beliefs. That might include the production of environmentally or socially harmful products such as weapons and tobacco or cultural factors such as company support for workplace diversity.
According to O'Connor, interest in environmental, social and corporate governance (ESG) investing has become integral to the decisions investment managers make around fund allocations.
"Consideration of environmental, social, governance and ethical factors is becoming the expected minimum standard of good investment practice, with a majority of Australian managers stating a commitment to responsible investment," said O'Connor.
It's not just niche funds prioritising ESG; the trend is very much being noticed by the big end of town. Last year, AMP Capital divested itself of all tobacco-related investments from its portfolios as part of a move to follow a "new ethical framework".
However, the report also found that fund managers aren't fully meeting the needs of their clients when it comes to fund allocation. While most customers concerned with ESG investing seek to avoid fossil fuel production (32%) and human rights violations (22%), ethical investment managers surveyed primarily screened funds for weapons and tobacco.
Of those surveyed, only 5% of funds under management excluded fossil fuels while 4% screened human rights violations.
Meanwhile, of the 120 fund managers that claimed to follow responsible investing guidelines, just 34 were taking a leading active approach to ethical investing. The table below shows which Australian equities investment managers achieved the highest ESG scores according to RIAA's report.
Australian equities investment managers with top ESG scores
|Australian investment managers|
|AMP Capital Investors||New Forests|
|Ausbil Investment Management||Pendal|
|Australian Ethical Investment||Perpetual Investments|
|Colonial First State||QIC|
|IFM Investors||Resolution Capital|
|Investa Property Group||Solaris Investment Management|
|JCP Investment Partners||Stewart Investors|
|Lendlease Investment Management||Stafford Capital Partners|
|Magellan Financial Group||U Ethical Funds Management|
|Maple-Brown Abbott||WaveStone Capital|