Australia’s responsible investment market dropped to $1.3 trillion in 2022, a 16 per cent decrease from the previous year, according to the Responsible Investment Association Australasia (RIAA).
In its 22nd annual Responsible Investment Benchmark Report, RIAA highlighted that this decline in responsible investment AUM was an “anomaly not seen in previous years”.
Contributing to this, the body said, was the weak performance of financial markets, both globally and in Australia, as they continued to adjust to stubbornly high inflation and consecutive rate rises.
“Evolving standards and increased regulatory scrutiny have led to tightening definitions of responsible investment by some large international investment managers who reported a smaller proportion of responsible investment assets under management (AUM) in 2022 than in 2021,” the report added.
The sector did see some wins, however, with a record 272 professional investment managers in Australia now engaging in responsible investing.
This accounted for $3.3 trillion or 93 per cent of all professionally managed assets in Australia, having grown from 57 per cent of the market and $2.1 trillion of AUM in the previous year.
Notably, corporate engagement and shareholder action passed ESG integration to become the preferred responsible investment approach, with AUM connected to corporate engagement and other stewardship practices increasing from $726 billion in 2021 to $790 billion in 2022, a surge of 9 per cent.
ESG integration took a back seat with an increase from $752 billion in 2021 to $783 billion in 2022, climbing 4 per cent compared to 16 per cent the year prior.
However, impact investing, while still the least preferred investment approach, grew substantially, nearly doubling from $30 billion to $59 billion.
“The data suggests that Australian investment managers are prioritising corporate engagement and ESG-related risk management while responsible investments are receiving increasing flows of capital,” RIAA noted in the report.
The association further identified that the proportion of investment managers who reported on both their engagement activities with companies and the outcomes of these engagements decreased, down from 45 per cent of investment managers in 2021 to 41 per cent in 2022. However, this still sits significantly higher than 2020 figures (31 per cent).
Meanwhile, out of the 272 investment managers in its research universe, RIAA identified 54 organisations as responsible investment leaders including Fidelity, BetaShares, JPMorgan AM, IFM Investors, Pendal, and First Sentier.
Twenty-three fund managers were also awarded the new responsible investor designation, rounding out RIAA’s responsible investment threshold to 77, up from 74 in 2021.
“This signals an overall strengthening of approaches to responsible investment by more market participants,” the association said.
The report also found that products certified under RIAA’s Responsible Investment Certification Program, on average, remained on par or surpassed benchmarks over medium and long-term periods, with managed growth funds particularly excelling.