Funds promoted as ethical or responsible investment in Australia have more than quadrupled in size over the past three years to $622 billion under management, with returns keeping pace with mainstream investment vehicles, according to analysis released today.
The rise of ethical investment — as well as other forms such as “socially responsible investing” — comes as universities and other institutions switch their portfolios to a more environmentally friendly, low-carbon-emission focus.
Just under $65 billion is now invested in “core” ethical investment products, with a further in $557 billion in funds categorised as managed by funds with a broad ethical investment strategy, such as those which account for environmental, social and governance (ESG) considerations.
Returns from ethical investment funds don’t match the market over every time frame, but the more established funds are starting to keep pace with broad returns.
At the same time, lenders are coming under pressure from shareholders and activists on what they choose to finance.
Analysis released this week by environmental finance group Market Forces shows the big four banks have lent $17 billion to expand the fossil fuel industry since declaring their commitment to the Paris Climate Agreement of keeping the world well below two degrees warming. However, Westpac, ANZ, NAB and Commonwealth have this year all ruled themselves out of financing the building of the controversial Adani Carmichael coal mine in Queensland.
Money flowing to coal investments is slowing in Australia. Lending to coal overall fell to $1.4 billion in 2016 from $3.1 billion in 2015. At July, it was at $458 million, according to Market Forces, which has been a vocal opponent of the Adani mine.
A key finding of the 2017 Responsible Investment Benchmark Report, released today, is that there has been an increase in negative screening particularly against weapons, tobacco, and gambling. There has also been a significant increase in exclusions based on nuclear power assets and situations where companies are linked to potential human rights abuses.
More and more funds are moving to a core policy of responsible investing. The benchmark report found asset managers in Australia using responsible investing as a core theme increased to 74 from 69 in 2016 and the number of products to 224 from 128.
And the returns compare well against mainstream vehicles, as these tables show:
Core responsible investment Australian share funds outperformed large-cap Australian share funds and the benchmark for all periods except for the one year term.
International responsible share funds outperformed the average mainstream fund in the three and 10 year time horizons, but slightly underperformed over the one and five years.
“More and more Australians are wanting their investments and savings to align with their values, and are reaping the rewards with strong financial performance,” says Simon O’Connor, CEO of the Responsible Investment Association Australasia.
“The market is recognising the opportunities to create value for clients, with a surge in responsible investment products over the past year, including many focused on delivering positive social or environmental impact.”
The Financial Services Council, which represents Australia’s retail and wholesale funds management businesses, superannuation funds, and life insurers, says it’s seeing a large increase in demand for products and investments that are socially and environmentally responsible.
“Currently the small size of the (social) impact investing market in Australia classifies it as a niche investment –- often falling within philanthropy or corporate social responsibility sectors,” the Financial Services Council said in a submission to the federal Treasury earlier this year.
“However, the growth of the market could see it transformed into an asset class of its own for traditional or mainstream investors as well with a market rate of return.”
At the end of December 2016, responsible investment grew 9% over 12 months to $622 billion in assets under management.
The benchmark report found that funds under management in core responsible investment strategies grew by 26% to $64.9 billion.
Fund manager Australian Ethical, a pioneer in responsible investing, says the annual Responsible Investment Benchmark Report found that funds implementing Core responsible investment strategies outperformed equivalent Australian and international share funds, and multi-sector growth funds, over most time horizons.
“Australian Ethical has met the evolving needs of retail and institutional investors who are coming to understand that responsible investment and strong financial returns can go hand in hand,” says Phil Vernon, managing director of Australian Ethical.
Australian Ethical grew by 37% in assets under management and 24% by member growth in 2016.