11 December 2020
Responsible Investing posts its 19th consecutive year of growth in Australia
A number of research papers show that the proportion of ESG funds continues to grow, with this growth only accelerating during the COVID-19 pandemic. Furthermore, funds classified as being responsible investment are not only growing as a proportion of total investment but are also growing as an investment category in its own right.
The strong performance of these funds could be the key reason behind this trend. Data collected by Morningstar noted the outperformance of ESG related funds throughout the COVID-19 pandemic, with 70% of sustainable equity funds finishing in the top halves of the Morningstar Categories, and 24 of 26 ESG-tilted index funds outperforming their non-ESG counterparts.
The annual Responsible Investment Benchmark Report prepared by the Responsible Investment Association Australia (RIAA), published in September 2020, also notes that for the 19th consecutive year, funds managed under responsible investment approaches in Australia grew as a proportion of managed investments. The report details the size and growth of Australia’s responsible investment market over the 12 months to 31 December 2019. Most notably, funds that are classified as “responsible investment” now account for 37% of Australia’s total $3,155 billion in professionally managed assets.
Key takeaways from the report suggest that:
1. The responsible investment market continues to grow
Investment managers are continuing to adopt a range of responsible investing approaches. The report uncovered that ESG integration was the primary responsible investing approach, with 87% of responsible investment AUM ($1 trillion) managed using ESG integration as a primary approach. This is a substantial increase from 2018 where 47% of responsible investment AUM ($680 billion) used ESG integration as a primary approach to portfolio construction.
Increasingly, investors are also driving capital towards sustainability-themed and impact investing allocations with responsible investment AUM using sustainability-themed investing growing from 4% in 2018 to 6% in 2019. Furthermore, allocations to Green, Social, and Sustainability Bonds more than doubled compared to 2018.
2. More investment managers are applying responsible investing approaches
The report found that of the 165 investment managers in the Responsible Investment Research Universe, 44 (27%) were found to have applied a leading approach to responsible investment (score ≥75% on the expanded Responsible Investment Scorecard).
What does this mean for boards and management teams?
It is likely that the continued growth of responsible investing, including the use of ESG integration as an investment criterion, is expected to result in boards facing increasing pressure from investors across a range of non-financial issues that need to be considered.
Notably, the COVID-19 pandemic demonstrated the resilience of funds that take an ESG approach. According to Refinitiv data, even during the pandemic, ESG funds globally saw inflows of US$36 billion during the first quarter of 2020. Morningstar data notes that during the same period, the broader fund universe had an outflow of $384.7 billion.
Taken together, the growth and outperformance of responsible investment funds highlight that to remain attractive for investment purposes, boards and management teams need to be well-versed on the ESG inputs that investment managers are increasingly considering. Failing to do this could result in companies not receiving the optimal level of capital market support, thus impacting valuation and increasing the cost of capital.
The strong performance of these funds could be the key reason behind this trend. Data collected by Morningstar noted the outperformance of ESG related funds throughout the COVID-19 pandemic, with 70% of sustainable equity funds finishing in the top halves of the Morningstar Categories, and 24 of 26 ESG-tilted index funds outperforming their non-ESG counterparts.
The annual Responsible Investment Benchmark Report prepared by the Responsible Investment Association Australia (RIAA), published in September 2020, also notes that for the 19th consecutive year, funds managed under responsible investment approaches in Australia grew as a proportion of managed investments. The report details the size and growth of Australia’s responsible investment market over the 12 months to 31 December 2019. Most notably, funds that are classified as “responsible investment” now account for 37% of Australia’s total $3,155 billion in professionally managed assets.
Key takeaways from the report suggest that:
1. The responsible investment market continues to grow
Investment managers are continuing to adopt a range of responsible investing approaches. The report uncovered that ESG integration was the primary responsible investing approach, with 87% of responsible investment AUM ($1 trillion) managed using ESG integration as a primary approach. This is a substantial increase from 2018 where 47% of responsible investment AUM ($680 billion) used ESG integration as a primary approach to portfolio construction.
Increasingly, investors are also driving capital towards sustainability-themed and impact investing allocations with responsible investment AUM using sustainability-themed investing growing from 4% in 2018 to 6% in 2019. Furthermore, allocations to Green, Social, and Sustainability Bonds more than doubled compared to 2018.
2. More investment managers are applying responsible investing approaches
The report found that of the 165 investment managers in the Responsible Investment Research Universe, 44 (27%) were found to have applied a leading approach to responsible investment (score ≥75% on the expanded Responsible Investment Scorecard).
What does this mean for boards and management teams?
It is likely that the continued growth of responsible investing, including the use of ESG integration as an investment criterion, is expected to result in boards facing increasing pressure from investors across a range of non-financial issues that need to be considered.
Notably, the COVID-19 pandemic demonstrated the resilience of funds that take an ESG approach. According to Refinitiv data, even during the pandemic, ESG funds globally saw inflows of US$36 billion during the first quarter of 2020. Morningstar data notes that during the same period, the broader fund universe had an outflow of $384.7 billion.
Taken together, the growth and outperformance of responsible investment funds highlight that to remain attractive for investment purposes, boards and management teams need to be well-versed on the ESG inputs that investment managers are increasingly considering. Failing to do this could result in companies not receiving the optimal level of capital market support, thus impacting valuation and increasing the cost of capital.
