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Perspectives on Cyber Risk
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Responsible investment strategies reportedly deliver better growth than alternative

Responsible investment strategies reportedly deliver better growth than alternative

July 31, 2017 12:10 PM | Print this page

The Responsible Investment Association Australasia (RIAA) is an industry body representing responsible, ethical and impact investors across Australia and New Zealand. Each year since 2002, the RIAA has commissioned research into the size and growth of responsible investment in Australia with the aim of gathering data on the various forms of responsible investment and to present analysis of growth in the sector in comparison with the total investment market.

The annual Responsible Investment Benchmark Reports chart the ongoing growth of responsible investing strategies, and identify key drivers of capital flows towards responsible investment as well as the barriers to uptake. The latest report details industry data on the size, growth and performance of the Australian responsible investment market over the 12 months to 31 December 2016 and compares these results with the broader Australian financial market.

Key Findings include:

  • Responsible investment (RI) up 9% since previous report, now represents 44% of all assets professionally managed in Australia: as at 31 December 2016, responsible investment constituted $622bn assets under management (AUM) up 9% from$569bn in 2015, representing around half of all assets professionally managed in Australia (44%). $557.1bn AUM are managed through a Broad responsible investment strategy while $64.9 billion AUM constitute Core responsible investments.
  • 26% increase of AUM subject to core responsible investment strategy: While there has been 9% growth in the overall Total RI Assets Under Management, there has been a 26% increase of AUM subject to Core responsible investment strategies.
  • Responsible investment strategy delivers better returns than traditional strategy: Funds that are implementing core responsible investment strategies are outperforming equivalent Australian and international share funds, and multi-sector growth funds, over most time horizons. Despite the better financial performance, perceptions of RI funds' underperformance is indicated by respondents as the biggest barrier to growth of the RI sector.

The AFR comments that though the report presents evidence of strong returns over the medium to long term, strict ESG strategies did not perform as strongly as traditional strategy over the short term: 'While performance over the medium to long term was superior, strict responsible investment strategies lagged over the short term in calendar 2016 as many resource and energy stocks – which are typically excluded from responsible investment strategies – rebounded strongly'.

Consideration of ESG factors is consistent with a fiduciary investor's duty to invest prudently in the best financial interest of beneficiaries
On a similar theme, a recent article, published in Superannuation Law Bulletin argues that environmental, social and governance (ESG) factors represent material business and economic risks and that investing having regard to ESG factors is therefore both consistent with, and required for, fiduciary investing: 'A superannuation trustee has a positive duty to consider risk in formulating and implementing its investment strategies...there is an ever growing and compelling body of evidence to suggest that ESG factors are financial factors and must be taken into account by a fiduciary investor, just like any other financial risk. Equally, failure to take into account ESG factors could also create the risk of significant financial detriment. Increasingly, members and stakeholders are engaging with the issue and not just in terms of having ESG options available on the investment choice menu. ESG investing is becoming "mainstream".'

The article adds that there is nothing in the current legal framework governing Australian superannuation trustees to inhibit ESG investing, in fact consideration of ESG factors is consistent with regulatory requirements.

[Sources: [Registration required] Responsible Investment Association Australasia: Responsible Investment Benchmark Report 2017; The AFR 25/07/2017; [registration required] Pam McAlister, 'ESG investing —the legal case' Superannuation Law Bulletin July 2017]