Sustainable investment is gaining in popularity, and evidence suggests that it doesn’t have to come at the cost of lower returns.
Australia’s responsible investment market grew by a fifth to $1.54 trillion in 2021, and now represents 43 per cent of all professionally managed funds, according to a report this month from the Responsible Investment Association Australasia.
“Responsible investment is on the rise – there are more organisations doing it, and they’re getting better at it,” says Estelle Parker, executive manager, programs at the RIAA.
Responsible investment, also known as sustainable or ethical investment, takes a broader-based approach to investing, looking beyond pure financial performance and risk to also consider the impact on people, society and the environment.
The RIAA considers 74 investment managers, out of a total of 140, to be “Responsible Investment Leaders”, based on its assessment scorecard – widely considered the gold standard for the industry in Australia – after 17 managers were added to the list in the past year.
“Companies that have strong credentials around responsible investment and ESG are better run companies. You would expect them to outperform,” says Chris Mather, head of platform distribution at BT.
Of the nine managed portfolios added to the BT Panorama funds management platform in the June quarter, seven had an ESG focus. That reflects demand from financial advisers, who are themselves responding to a younger, more socially-aware client base.
“There’s a whole cohort of younger investors through inter-generational wealth transfer and that’s going to continue to accelerate,” Mather says. There’s also a growing number of female investors, who are more likely to factor in ESG considerations when making financial decisions, he adds.
Four out of five Australians now expect their bank account and super to be invested responsibly and ethically, the RIAA report showed, while 74 per cent of Australians would consider moving to another provider if they learned their current super fund invested in companies engaged in activities inconsistent with their values.
Growing demand is helping to drive more diversity in the range of responsible investment products on the Australian market. Options are expanding beyond the traditional areas of equities and bonds into asset classes such as property, infrastructure, private equity, and forestry and farmland.
New innovations are also emerging in green bonds and sustainability-linked finance. For example. a recent loan deal Westpac participated in for North Queensland Airport includes key performance indicators which incentivise the operator to enhance the natural habitat surrounding Cairns Airport.
Despite the strong progress, the industry still faces challenges, with more work to be done to combat ‘greenwashing’ – where organisations or funds misrepresent or exaggerate their environmental and social credentials.
Meanwhile, the sheer body of information being put out by fund managers, along with multiple different ways of looking at responsible investment – the RIAA report lists seven different approaches – can make it a difficult landscape for financial advisers to navigate, says BT’s Mather.
BT now offers menu options specifically for responsible investment and ESG, where previously financial advisers had to look at each fund individually to identify its credentials.
There’s still a perception that putting your money in a responsible investment means making a sacrifice on income, with the report showing that performance concerns were the biggest barrier to growth in the sector.
However, the report found that multi-asset growth funds certified by the RIAA are outperforming the overall market.
For example, over a 10-year timespan, RIAA-certified multi-sector funds delivered a return of 25.7 per cent per annum, compared to 8.8 per cent per annum for the Morningstar index, which has no responsible investment filter.
More careful investment selection and stronger risk management were among the reasons behind the outperformance, according to the RIAA.
Still, it's true that in the past twelve months, equity-focused responsible investment products have tended to lag the broader benchmark. That’s mainly because they have less exposure to fossil fuel producing companies which have benefited from soaring prices.
“There are going to be cyclical changes, and we’ve seen that in the energy crisis this year,” the RIAA’s Parker says. “But when you look at the trajectory of the global energy transition, responsible investors are actually well positioned for that.”
RIAA’s report shows that performance concerns are unfounded when you look at the long-term risk-adjusted returns, she adds.
"Consideration of ESG factors in investment decision making is now widely understood to positively impact performance, so hopefully that message will get through.”