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ESG now ‘expected minimum’, shaping $1tn in investments

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Consideration of environmental, social and governance factors has been slated as the bare minimum for good industry practice by a responsible investment body, with a new study finding around $1 trillion in Australian managed assets are influenced by ESG integration.

The findings have come from a new report by the Responsible Investment Association Australasia (RIAA) and KPMG, surveying 165 investment managers.

The Australian responsible investment market continued its upward trajectory in 2019, rising by 17 per cent from the prior year to holding $1.1 billion in assets under management. The total represented 37 per cent of Australia’s total $3.1 trillion in professionally managed assets.

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RIAA chief executive Simon O'Connor commented ESG factors are now the “expected minimum of good investment practice, with $1 trillion of Australia’s AUM (assets under management) managed using ESG integration as a primary approach”.

ESG covered 87 per cent of money placed in responsible investment, jumping by 47 per cent from its previous $680 billion in 2018.

The second most common approach shaping the final construction of responsible portfolios was corporate engagement and shareholder action (36.5 per cent). 

The majority of surveyed investment managers (79 per cent) reported they have at least one asset class (or 50 per cent AUM) covered by an explicit and systematic approach to ESG integration, while 41 per cent have more than three asset classes or 85 per cent of their AUM covered. 

The RIAA report however has suggested disclosure could be an area of improvement for investment managers, with only 36 per cent not making any public disclosure of their holdings.

Mark Spicer, director and head of ESG/responsible investing at KPMG Australia said there are signs of a maturing market in Australia, but more can be done by the “majority of asset managers” to show how they have embedded responsible strategies into their approach, and to report on their impact.

“Members want it and investment mandates are increasingly demanding greater transparency,” Mr Spicer said. 

“The Australian investment community has a pivotal role to play in helping achieve the Sustainable Development Goals and Paris Agreement on climate change,” Mr O'Connor added.

Meanwhile, impact investments surged, growing by 249 per cent in the space of two years to $19.9 billion in 2019, with 111 products available to Australian investors.

Responsible funds outperforming

According to the report, responsible investment funds outperformed the Morningstar average mainstream international share fund almost every time frame, as well as beating out the average Australian equity and multi-sector funds across one, three, five and 10-year performances.

The largest gaps were between the five and 10-year returns for the average investment fund against the Morningstar average Australian equity fund (10.1 per cent for the responsible average over five years, against 7.8 per cent from the Morningstar fund, as well as 9 per cent against 6.8 per cent for 10 years) and the one year return for multi-sector growth funds (19.48 per cent for responsible funds against 16.22 per cent for the Morningstar average).

“Companies or assets are unlikely to thrive if they ignore issues such as climate change, health and safety, labour rights, corruption and lack of diversity,” Mr O'Connor said.

“Investors are fast realising that consideration of these issues provides more informed investment decisions, such as valuation and asset allocation.”

Another RIAA study released earlier this year found the majority of Australians expect their savings (87 per cent) and superannuation (86 per cent) to be invested responsibly and ethically.

 

ESG now ‘expected minimum’, shaping $1tn in investments
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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