The latest annual report from the Responsible Investment Association Australasia (RIAA) confirms ethical investing is no longer of fringe interest, but is rapidly becoming mainstream.
Responsible investments have more than quadrupled over the past three years to $622 billion, with 44 per cent of Australia’s assets under management now being invested through some form of responsible investment strategy.
More than 40 per cent of assets under management is invested through some form of responsible investment strategy Photo: Getty Images / AFR
These strategies include negative screening, impact investing, sustainability themed funds and the integration of environmental, social and governance factors
It is not so much investors choosing to invest ethically as it is the managers of mainstream investment funds and superannuation funds increasingly recognising that managing money with an ethical dimension produces better returns.
It’s becoming more common for super funds to exclude investments in particular industries, such as fossil fuels or tobacco, for example, from all their investment options.
Last year, the RIAA reported 70 per cent of the largest-50 super funds had some level of commitment to responsible investment.
And half of the largest-50 funds offered at least one responsible investment option to their members.
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The latest report shows that over the five years to end of 2016, the typical responsible “multi-sector” fund (managed funds and super funds) produced an average annual compound return of 12.3 per cent compared to a return from the typical mainstream multi-sector fund of 9.7 per cent.
“It is a long outdated myth that financial returns must be sacrificed to invest responsibly or ethically,” says Simon O’Connor, the chief executive of the RIAA. “The performance figures and trends we are now seeing each year are telling us the opposite story,” he says.
It’s not easy for investors interested in investing ethically to navigate their way around.
That’s because there so many labels, some of which appear to have more to do with marketing than with how the money is actually managed.
In fact, it’s worse than that because there is no requirement for funds to disclose their portfolio holdings.
A global survey conducted by researcher Morningstar in 2015 found that of 25 markets around the world, Australia was the only with no mandated form of portfolio holdings disclosure.
Morningstar noted back then that the implementation of legislation that would lead to holdings disclosure for superannuation funds (it doesn’t include managed funds) had been repeatedly delayed.
And now again, in June this year, the Australian Securities and Investments Commission extended the deadline after which super funds are required to disclose their portfolio holdings to 2020.
Many funds do reveal at least their biggest holdings regularly on their websites.
But it will be another 2½ years, assuming no further delays, before investors and researchers will be able to check that a super fund is investing the way it says it does.
RIAA is filling the gap with a certification program where a fund has to reveal its portfolio holding.
The RIAA audits the holdings and management process and gives its tick of approval if the claims of the fund match the reality.
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