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Australian fund managers get a 'pass' mark on their social conscience

World Solar Challenge cars in Adelaide. Morne de Klerk/Getty Images for World Solar Challenge

Placing sustainability and ethical impact at the centre of investment decisions is becoming mainstream for Australian fund managers.

More than half equity fund managers rank higher than their global peers when it comes to incorporating environmental, social and governance (ESG) factors in their investment decision.

According to Lonsec Research’s Responsible Investment Sector Review, 58% of active Australian equity funds achieved a pass mark compared to only 46% for global funds.

“We wanted to get an understanding of how active equity managers outside of the responsible investment sector are incorporating ESG in their investment decisions,” says Lonsec Research senior analyst Steve Sweeney.

“Even though many funds are not specifically targeting the responsible investment market, many funds do look at ESG factors when selecting shares. Our research shows active Australian equity managers tend to do better in this area than overseas managers, and this is reflective of a growing local interest in responsible investing in recent years.”

However, very few funds were able to achieve the highest ranking and 21% of funds were rated low.

Environmental, social and governance (ESG) factors are also good for returns.

Australian Responsible Investment equity funds researched by Lonsec returned an average of 1% over the past year and 9.1% over the past five years compared to the S&P/ASX 300 Accumulation Index returns of -5.8% over 12 months and 5.4% over five years, as this chart shows:

“The merits of including ESG analysis in the investment approach have gained broad acceptance among investment practitioners,” says Sweeney.

“We have reached the point where it is rare to find an Australian equities manager that completely ignores ESG factors within their investment approach. Indeed, the performance of the Responsible Investment sector speaks for itself.”

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