Responsible Investment Funds are outperforming standard equity funds, says a new RIAA report, unveiled yesterday in Melbourne.
At a panel event held at Ernst & Young’s Melbourne offices, the Responsible Investment Association Australasia (RIAA) launched its annual Responsible Investment Benchmark Report 2015. The report details the improved state of responsible investment across Australia & New Zealand, and has managed to dispel many of the notions held by general and professional investors.
The core activities of these successful funds are based on negative screening, sustainability themed investing, and impact/community investing. According to the report, core responsible investment funds have more than doubled in the last two years, rising from $15.2 to $31.6 billion in assets under management (AUM). This accounts for 5% of the $692 billion Responsible Investment AUM in Australian and New Zealand internationally.
More broadly, the underlying themes of the report state that:
- Responsible Investment (Australian Equities) Funds strongly outperform ASX300 / Large Cap Australian Equities Funds for the last 1,3,5 & 10 year time periods.
- Responsible investment (International Equities) Funds have outperformed Large Cap funds over the last 1,3 & 5 years.
- Responsible multi-sector growth funds (balanced funds) also outperformed mainstream growth funds.
So there you have it. For many years, the general population has preferred to stay with regular investment funds for their superannuation, as the myth has been built that ethical investment brings weaker returns over the long term. As has been the case for several years now, this simply isn’t true. Across the board private institutional and individual investors and shareholders are taking a stronger interest in investment ESG mechanisms and governance, expecting that their funds bring back more than just a financial return. Even for more conservative investors this is still an issue; whilst not actively providing capital to responsible investors, more and more they are demanding a return that has no negative impacts on society or the environment.
For the more active investors, and those signatory to the UN’s Principles for Responsible Investing (PRI), investment valuation goes far beyond the general values and ethics concerns. These 73 Australian PRI Funds (with collective AUM of $821 billion) have engaged in divestment of fossil fuel and carbon emissions intensive assets, and divestment of tobacco assets. Add to this, significant forays into social impact investing, and sustainability themed investing (renewable energy and clean tech), and we are seeing a bottom-up demand that is stimulating growth and building momentum for the Responsible Investment trend.
An important part of this puzzle is the level of transparency and reporting around ESG risk exposure. According to research by Ernst & Young’s Sustainability & Climate Change Practice (also presenting at the launch), two thirds of Australian investors believe that fund managers don’t disclose ESG Risks enough. This, in part, accounts for 64% of investors being concerned about stranded assets (such as coal and other fossil fuel extractive industries), and is in some measure partially responsible for a 27% investor withdrawal from these assets in the last few years.
Compared to trends globally, the Australian market is showing real signs of market mechanism-based leadership. In the Netherlands, RI growth is due to intense environmental lobby groups and strong activism. In the UK – particularly in London – there is some demand for ESG risk management and responsible investment, however institutional investors are around two to three years behind their Australian counterparts. Surprisingly, Australian investors are doing well in US markets, mainly due to progressive appetites of a large proportion of Fortune 500 companies.
This report is the flagship benchmarking report for the RIAA, an Australia/New Zealand network of over 150 members managing a combined $500 billion in assets worldwide. You can read the full report here.