The responsible investment market continues to grow, with assets under management (AUM) up 17% over the course of 2019 to $1.149 trillion, but disclosure of full fund holdings continues to lag, according to research from the Responsible Investment Association Australasia (RIAA).
RIAA has published the Responsible Investment Benchmark Report 2020 Australia in conjunction with KPMG. The annual report traces the growth and progress of the responsible investment industry in Australia. The report finds that 37% of total professionally managed assets under management (TAUM), which now sits at $3,135 trillion according to the Australian Bureau of Statistics. In additional to growing in terms of AUM, the industry is also deepening its best practice, according to Simon O'Connor, RIAA CEO.
"We're at a point where responsible investing is becoming a major part of the broader financial market," O'Connor said. "We're moving into a phase where it's more than just policies and processes, it's about can you start demonstrating that you're delivering real world outcomes from your responsible investment practices?"
Negative screening remains an important responsible investment strategy, and weapons, tobacco, gambling and pornography are the most frequently screened categories. The screening for fossil fuel exposures is beginning to catch up to consumer expectations, the report noted - in 2019, 14% of responsible investment AUM was screened for fossil fuels, almost trebling from 2018.
The report assessed 165 investment managers assessed in the study, and found 44 - 27% - are practising a 'leading approach' to responsible investment. Disclosure of fund holdings remains a key area for improvement, with 36% of investment managers not making any public disclosure of their holdings. Of the 165 investment managers in the Responsible Investment Research Universe, 36% disclose their full fund holdings and 28% disclose some holdings.
Of the investment managers that participated in the RIAA survey that formed part of the research data, 34% were new to the 2019 Responsible Investment Research Universe. This represents significant growth in the Responsible Investment Research Universe from 2018 to 2019.
"This year, we overlaid an expanded Responsible Investment Scorecard over an expanded universe, and only include those that can demonstrate best practice," O'Connor noted. "The proportion of the market that reveals their full holdings disclosure is 36% now. That's low on a global basis."
Of those 165 investment managers, 70% report on stewardship activities, but only 21% "can really talk about the activities and the outcomes in terms of really comprehensive stewardship," O'Connor added.
The responsible investment approaches that most influence the final construction of responsible investor portfolios is environmental, social and governance (ESG) integration, and corporate engagement and shareholder action, representing 44% and 37% of responsible investment AUM under a primary and secondary investment strategy, respectively, the report found. The findings show a small shift in focus by investors on last year's preferences towards corporate engagement and shareholder action.
"The other one that's really emerged, you're seeing this strong commitment by investment managers to international norms and conventions - the Paris Agreement, the [Sustainable Development Goals] SDGs, the UN Global Compact. This is really leading to ramping of reporting outcomes and to commitments to aligning portfolios."
While investment managers are demonstrating alignment of portfolios to positive impacts and outcomes, there is still a mismatch between what products are available and what consumers are seeking. Negative screening of fossil fuel exposures are increasing - in 2018, only 5% of responsible investment AUM for survey respondents who conduct negative screening was screened for fossil fuels. In 2019, 19% of responsible investment AUM has been screened for fossil fuels.
For consumers using RIAA's Responsible Returns online tool, the most important exclusionary screens are fossil fuels (36%), human rights abuses (17%) and armaments (12%). Further, responsible investment AUM using sustainability-themed investing grew from 4% in 2018 to 6% in 2019. The most popular themed investments by AUM are social impact (20%), agriculture (13%) and climate change (10%).
"What you're still seeing there is a little bit of a slight mismatch between the positive impact consumers are looking for, and the products in the marketplace," O'Connor said. "What we see as the number one search term on responsible Returns is renewable energy, and they're still a small proportion of product. There's been a catch-up and better alignment, but still a ways to go to matching the issue that consumers are most interested in with the products in the market."
A vast majority - 87% of responsible investment AUM - is managed using ESG integration as a primary approach. The marked jump for ESG integration (47%) from $680 billion in 2018 to $1 trillion indicates that survey respondents are increasingly recognising that ESG factors provide better and more informed investment decisions, such as valuation and asset allocation.
Seventy-nine percent of investment managers in the Responsible Investment Research Universe have at least one asset class (or 50% AUM) covered by an explicit and systematic approach to ESG integration, while only 41% have more than three asset classes (or 85% of their AUM) covered.