Responsible investing has never been more popular in Australia and more fund managers are providing products, but there is a big gap between exclusions applied by managers and what’s important to the investors.
The Responsible Investment Association of Australasia’s (RIAA) latest Responsible Investment Benchmark Report for 2018 reveals that around 32 per cent of consumers searched to exclude fossil fuels and 22 per cent for humans rights violations.
The report shows that only 5 per cent of investment managers use a negative screen to exclude fossil fuels and just 4 per cent for human rights.
Head of client relationships at Australian Ethical, Leah Willis says: “There is a natural bias in Australia for funds to be heavily weighted towards resources mining and also big banks that contribute to funding of mining. This is something fund managers need to consider over time in terms of their portfolio.”
On the other hand, controversial weapons and tobacco are the most prevalent exclusionary screens for investment managers at 31 per cent and 30 per cent.
The report reveals that only 10 per cent of consumers are searching for funds that exclude controversial weapons and 9 per cent for tobacco.
RIAA chief executive Simon O’Connor says: “There has to be this meeting in the middle of what fund managers can deliver on, of what actually represents a good investment pool and how to allocate that, consistent with the client’s desires and interest and continues to deliver.
In order to meet in the middle, active funds management is evolving to be more involved and hold businesses accountable for their governance decisions.
O’Connor says: “That’s why are we seeing much more active use of engagement and voting as tools to reflect the consumer sentiment and views but not just purely excluding potential large parts of the market cap index.”
RIAA reveals the continuous growth of the responsible investment market, representing 44 per cent of total professionally managed assets under management at $980 billion. This is a 13 per cent increase from the previous year.
The responsible investment funds outperformed mainstream funds over the longer term. Australian equities responsible share funds produced an average return of 5.7 per cent over three years, underperforming the S&P/ASX 300 index of 6.65 per cent.
Over five years the funds produced an average return of 6.43 per cent and 12.39 per cent over 10 years. This is compared to returns of 5.6 per cent and 8.91 per cent respectively for the S&P/ASX 300 index.
O’Connor says: “The findings of our report refute any misconception that investing responsibly comes at a cost in terms of performance and contribute to the mounting body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet.”
Responsibly managed international share funds were outperformed by the MSCI World Ex Australia NR benchmark over a one-year, five-year and 10-year periods but beat the benchmark over three years at 11.18 per cent, compared to 7.49 per cent.
In addition, responsibly managed multi-sector funds outperformed the Australia Fund Multisector Growth benchmark for each category.
O’Connor says: “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.”
Environmental, social, governance (ESG) integration strategy represents 45 per cent of assets under management (AUM) when taking both primary and secondary strategies into account.
According to the report, ESG integration involves the systematic and explicit inclusion of environmental, social and governance factors into the investment decision-making process.
Of the 120 investment managers assessed only 34 apply a leading approach to ESG integration which is 10 more than the previous year.
This has grown to include superannuation with inflows of 42 per cent of AUM into retail funds compared to 30 per cent in 2017. This aligns with RIAA’s research showing 9 in 10 Australians expect their superannuation and other investments to be invested responsibly and ethically.