Responsible investment options have outperformed the general investment market in recent years meaning that you can get a better return by ensuring your investments align with your values.
New research in the Responsible Investment Benchmark Report found that funds available to Australian investors with a responsible overlay had returned 7.2 per cent over calendar 2020 compared with 2.9 per cent for the overall average.
And over 10 years, responsible investments returned an average of 8.2 per cent annually compared to 6.9 per cent in the general market.
The report was produced by the Responsible Investment Association of Australia and consultants KPMG.
RIAA policy and standards manager Nicolette Boele said the outperformance was in part a result of resilience built into the industries favoured by responsible investors.
“If you take into account environmental, social and governance [ESG] risk factors when you value companies and allocate capital you’re tilting towards those that can deal with shocks and strains caused by things like COVID and climate change,” she said.
The categorisation had proved itself over time when looking over “three, five and 10 years”, she said.
The returns also demonstrate that the once commonly held belief that responsible investments have lower returns no longer stacks up.
“I think the opposite is now true and there is some outperformance potential in ESG when its done well,” said Mark Spicer, responsible investment leader with KPMG.
Market movements were also reflecting increasing concerns on climate risk.
“In the old days, if you were in coal that was great because companies performed well,” Mr Spicer said.
“But now it’s a lot less exciting and and there are lower returns from it with some significant funds getting out of coal altogether.”
Funds that no longer invest in coal “are no longer exposed to that loss of value” so were able to benefit more from growth in other areas, Mr Spicer said.
Demand for ESG growing
That investors are increasingly demanding a responsible investment overlay was demonstrated by the fact that in the Australian market, ESG investments grew by 23.6 per cent, or $298 billion, to $1.28 trillion in calendar 2020.
The remainder of funds outside the responsible overlay shrunk by 12.2 per cent, or $234 billion, to $1.92 trillion.
So, all up, responsible assets accounted for 40 per cent of funds under management in Australia compared to only 31 per cent in 2019.
While many of Australia’s 198 investment funds make some claims to responsible investment practices, the number RIAA classes as ‘responsible leaders’ grew to 54 compared to 44 a year earlier.
Responsible-investment leaders are managers that scored at least 15 out of 20 on RIAA’s Responsible Investment Scorecard.
There are two drivers towards responsible investing: demand from offshore investors to increase ESG exposure in response to regulation in their home markets and the overwhelming drive from Australian investors and fund members for their money to be doing good in their eyes.
“People are saying ‘I don’t just want to buy free range eggs, I now want to have my super aligned with my values,'” Ms Boele said.
Using the example of UniSuper, Ms Boele said, “they’ve had people move out of their mainstream fund into certified sustainability options at a rate bigger than they experienced the previous year into their whole fund.”
To a degree, ESG-focused funds are out of step with the needs of their investors, particularly where the funds used ‘negative screening’ overlays to block investments in certain areas.
The report found that a number of funds that used negative screening had exclusions that were not major concerns for their investors.
Although they generally had fossil fuels and highly polluting industries as their main exclusions they were generally followed by tobacco, nuclear weapons and firearms.
However, investors highly valued human rights and animal cruelty as exclusions where these were generally not featured highly in negative screens.
“In 2021 investors just expect that management doesn’t have tobacco and nuclear weapons in there,” Ms Boele said.
Those ESG concerns left out of negative screening were emblematic of a growing sophistication of investors that meant they were concerned not only with what industries did but how they did it.
“If you’re an investment manager it’s really easy to classify companies based on their activities. Human rights and animal welfare are how things get done,” Ms Boele said.
Investment managers need to look more deeply into company operations to screen for those concerns.
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