In the past five years, Australia has witnessed a significant increase in funds being managed under responsible investment commitments, growing by 40 per cent in the past year alone to reach more than half of all professionally managed assets in the country.
Growth in the ethical or socially responsible segment of the responsible investment market has been even more rapid, more than tripling in three years, reaching 12 per cent of all professionally managed assets after a decade of sitting at below 2 per cent of the market.
This ramp-up of focus on sustainability and ethical issues by the Australian finance community is notable particularly in light of legislative support for responsible investment being near absent, domestic political action in many key focus areas (such as climate change) going backwards, and an industry going through a reckoning of sorts as a Royal Commission unpacks some of the most egregious of activities by segments of the finance industry.
And yet, progress continues to gather pace.
So the logical question is: what is driving the growing focus on responsible investing in Australia?
Value-led demand
As with most growing markets, there are multiple factors at play, but not least of these is that an increasing proportion of Australians have become more engaged with where and how their investments and savings are being invested.
Key Points
- Australia has seen a big increase in funds managed along responsible investment lines over the past five years.
- Nine out of 10 Australians expect pensions and investment to be invested responsibly.
- Responsibly managed investment products are emerging across all asset classes and investment styles in Australia.
Increasingly, Australians are asking their pension fund, their fund manager, bank or financial adviser about whether their own retirement savings and investments are aligned with their values.
Due to the compulsory nature of Australia’s defined contribution pension system, all working Australians are directing 9 per cent of their salaries into their pension, a system that results in every Australian being an investor, and for most, their pension being the first or second largest investment they will make (next to buying a home).
The Responsible Investment Association Australasia polled consumers in 2017 and found that 9 in 10 Australians expect their pensions and other investments to be invested responsibly and ethically, displaying the expectation that their money is being managed in a way that, as a minimum, does no harm.
Possibly an even stronger signal from our consumer research is that four in five Australians would consider switching their pension or other investments to another provider if their current fund engaged in activities inconsistent with their values.
Although we still see these results as well above the proportion of Australians actually taking action, we nonetheless have seen sizeable movement of funds flowing towards more ethically managed investment products, leading to more products targeting this growing client segment. Simultaneously, the barriers to enter this pension market are dropping and it has become easier for pension fund members to switch funds. New start-up tech-based pension funds continue to enter the market, and all the new entrants we have identified have ethics and sustainability as a core part of their offering.
These, alongside well-established dedicated socially responsible pension funds, are starting to eat into the market share of the larger pension funds.
Large funds compete for spotlight
Meanwhile, many of Australia’s largest funds are putting their responsible investing credentials front and centre, noticing this as one key issue their clients are interested to know more about, and furthermore, a great way to get deeper engagement with clients.
This momentum is starting to snowball, as funds start a race to the top in responsible investing, growing ever greater awareness in the marketplace, as responsible investment becomes an important means to differentiate a pension fund in an otherwise highly commoditised market.
Beyond pensions, responsibly managed investment products are rapidly emerging in Australia across all asset classes and investment styles. These are not purely excluding the industries commonly screened out of socially responsible funds, such as tobacco, weapons, gambling, human rights violations, adult content and fossil fuels, but are also screening more funds in socially and environmentally positive industries, such as renewable energy, housing, medical technologies, sustainable transport and education.
This has helped to unblock a major impediment of growth, in that investors now have the ability to find good investment options across a full, diversified portfolio.
In this context of growing demand and surging numbers of products coming to market, clear labelling that verifies the quality of responsible investments has become increasingly important.
Certification is critical
RIAA runs the world’s longest running fund certification programme that aims to do just this – to verify the quality of responsible investing approach, to set a benchmark on quality and to require a high degree of transparency.
In the past two years, the number of products covered by our programme has grown to 160, up from around 50 products, and includes cash, fixed income, listed equities, impact investment products and pension funds – from wholesale to retail and beyond.
As has been the way for so many industries that see a growing demand from ethical consumers, from Fair Trade coffee, to free range eggs, sweat shop-free clothing and sustainable forestry, external verification that a product is delivering its responsible investing promise is ever more critical to giving consumers – and their advisers – confidence.
It is notable that in many of the world’s leading financial markets, discussions around product labelling and standard setting have emerged strongly, including in the UK and EU.
The importance of labelling remains as true in responsible investing as it does in coffee production. More than half of Australians surveyed in our research cited a lack of independent information available regarding switching to a responsible or ethical pension fund as an impediment to moving investments, while 86 per cent stated they would be more likely to invest in a fund that had been certified by an independent third party for its responsible practices.
As much as anything else, the importance of this certification programme is to act as outsourced due diligence for advisers and wealth management firms to find products that match their clients’ interests.
But client demand is only one part of what is driving Australia’s rapid uptake. Just as significant is that the smartest investors in our region now understand that the most sustainable companies make the best investments.
The finance sector in Australia is moving quickly to align itself with the desires of Australians. The current Royal Commission will only accelerate this, highlighting the desperate need for finance to reinstate the primacy of the consumer, and to rebuild the trust that it sorely needs to renew, of which responsible investing is a key part.
Simon O'Connor is chief executive of the RIAA
