Responsible investment continues to gain acceptance among investors

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Responsible investment is no longer considered a niche approach to investing.

There is a growing acceptance of responsible investment (RI) by millennials, women, affluent investors and institutions as the concept moves from being considered a niche and product-specific approach to one that has a proven track record of contributing to portfolio performance leading to a broader appeal among global institutional and retail investors, according to Nuveen’s TIAA Investments.

Amy O’Brien, Managing Director and Head of Responsible Investment at TIAA Investments, an affiliate of Nuveen, who presented to institutional investors at the Australian Institute of Superannuation Trustees CIO Forum, said the environmental, social and governance (ESG) ecosystem had expanded significantly and enabled growth in adoption of RI approaches.

“Responsible investment is no longer considered a niche approach to investing. It’s increasingly being seen as a mainstream approach, commanding a place as a prominent and recognised discipline that adds value to the investment process,” Ms. O’Brien said.

“Globally, approximately 300 policy tools or market initiatives covering the relationship between finance and ESG issues exist, half of which were developed between 2013 and 2016.

“We have seen greater emphasis on issues of materiality of corporate sustainability and more ESG-related data is available to investors than ever before. This helps inform new types of investment approaches, fulfill diverse motivations and more differentiated product.”

RI is an investment discipline that incorporates ESG factors into investment analysis, portfolio construction and ongoing monitoring across asset classes with the objective of enhancing long-term performance, managing risk and aligning client values.

Investor demand is the key driver

Ms. O’Brien said investor demand, especially from institutional investors, has been a key driver of RI growth.

“Global themes driving client demand in the RI market include climate change, gender equality, conflict risk, and impact measurements.

“These themes have led institutional investors to increasingly focus both on the materiality of ESG factors as well as outcome metrics aligned to the UN Sustainable Development Goals,” she added.

About 43 per cent of assets professionally managed in Australia in 2015, or A$581 billion, is managed through broad responsible investments that integrate ESG factors into investment decisions, according to the latest data from the Responsible Investment Association Australasia (RIAA).

Knowledge gap means missed opportunities

Ms. O’Brien said that while interest in RI is strong, many investors remained unaware of the availability of best-in-class products. A 2016 TIAA Investments survey in the U.S. found that one in four affluent investors and advisers said RI options were very limited or that the category lacked quality choices. More notably, 51 per cent of U.S. financial advisers said RI did not provide the same rate of return as other investment strategies, while 57 per cent of investors believed RI offered a lower rate of return than other strategies.

“The fact is that responsible investing strategies vary widely in their intent and approach. As an industry, we need to do a better job of helping investors understand how these strategies work and that it’s possible to build a well-diversified ESG portfolio,” Ms. O’Brien said.

She added that incorporating ESG criteria in individual security selection can, in fact, deliver market competitive returns while potentially reducing risk.

“Our analysis found little to no difference in ESG index returns compared to those of broad market benchmarks. That means a responsible investment approach has achieved comparable performance over the long term without additional risk, despite using a smaller universe of securities in order to meet ESG criteria,” she said.

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