The tides are turning in the world of investment.
As trust in business drops to its lowest level in years, a positive trend is fast emerging with the record growth of responsible investing.
A decade ago, just $70 billion of ‘s funds under management were managed with some form of responsible investment strategy.
Fast-forward 10 years and in 2016, responsible investments comprised $622 billion, making up nearly half (44 per cent) of ‘s assets under management.
But what’s causing this shift? To what degree is the rise of responsible, ethical and impact investing being driven by the management of risk versus performance or investor demand? The answer is all of the above.
Consumer research launched on Wednesday by the Responsible Investment Association Australasia (RIAA) shows that nine in 10 ns (92 per cent) expect their super or other investments to be invested responsibly and ethically.
And in an important signal to n’s superannuation, banking and wealth management sectors, four in five ns would consider switching their super or other investments to another provider if their current fund engaged in activities inconsistent with their values.
Millennials show the greatest interest in aligning their investments with their values, with 88 per cent prepared to make the switch if their current investments can’t deliver against their needs. Outperformance
Investors moving their money into more responsible investments are benefiting more than just their conscience, with responsible investment funds outperforming their average mainstream counterparts year on year.
RIAA’s 2017 Benchmark Report shows responsible investment n equities funds outperformed against their equivalent ASX300 and mainstream funds over three, five and 10 years.
But what does it mean to be make responsible investments? Divestment
From screening to shareholder engagement to impact investing, there are various approaches for making responsible investments, and investors will typically adopt a number of strategies.
Divestment is perhaps the most well-known strategy. In the past three years, more than 35 n super funds have divested themselves of tobacco and only two weeks ago, BT Financial Group, a division of Westpac, announced it was dumping its investments in tobacco and “controversial weapons”.
Additionally, there’s been an increase in negative screening against fossil fuels, gambling, nuclear power generation and human rights violations.
These trends are reflected in RIAA’s research showing that the top three issues ns want to avoid investing in are animal cruelty (69 per cent), human rights violations (62 per cent) and pornography (56 per cent). Investment
Yet while divestment is an important tool in the responsible and ethical investment toolkit, it is just one tool, and owners of capital are becoming much more focused on where their capital is directed, as opposed to from where it is removed.
The integration of ESG issues and opportunities into investment decision making is the most common responsible investment strategy, accounting for the largest proportion of funds under management in .
Whether a fund manager is considering the impact climate change policies will have on the energy companies in which it is investing, or how well a chemical company is managing OH&S issues to avoid spills and fines, ESG integration has fast become the benchmark of good investment practice. Active ownership
To complement this, a growing number of responsible investors are taking a more active ownership approach locally and globally, heralding a new wave of shareholder activism with the aim of shaping corporate activity to better consider risks that, for far too long, have been considered non-financial.
Whether it is engaging with BHP around its membership of bodies such as the Minerals Council of or Santos around how prepared its business is for a 2 degree low-carbon world, this next wave of shareholder engagement is not about aggressive board takeovers but rather getting our leading companies to better consider the interdependence between their business and broader society.
Put simply, more sustainable companies make better investments. A company wishing to thrive in the long term can no longer afford to ignore how it treats its workforce, the communities within which it operates, the environmental footprint of its activities, or the quality and diversity of its board of directors. Better investments
Assuming these trends continue, ns are only going to step up the demand for their savings to be invested in a way that does no harm and builds a better, fairer, more sustainable world into which they can retire well.
To help consumers navigate this space, RIAA has launched Responsible Returns, a web-tool that helps people search certified responsible investment products that align with their values and interests.
To be relevant into the future and benefit from the flows of finance into responsible investments, the onus now lies with companies and financial institutions to walk the talk and proactively demonstrate not just the negative impacts they are avoiding, but the positive outcomes they are delivering for the economy, communities and our environment.
Simon O’Connor is the chief executive of Responsible Investment Association Australasia.