Estelle Parker

New research released by the Responsible Investment Association Australasia (RIAA) has revealed that ESG considerations are now deeply embedded across investment markets in Australia.

RIAA’s 22nd annual Responsible Investment Benchmark Report has uncovered 93 percent of the professionally managed funds worth $3.3 trillion are managed by investors with public commitments to responsible investment, indicating a transition toward a new state of maturity.

Despite this, increasing standards has led to only 36 percent, or $1.3 trillion of total managed assets, being managed in a way that demonstrates a leading approach to responsible investment. Estelle Parker, Executive Manager of RIAA emphasised the significance of this shift.

“While this reflects a new level of commitment to responsible investment, we are seeing an industry that is responding to industry and regulatory efforts to tighten standards, with many domestic and international fund managers reporting a more conservative number of responsible investment assets for 2022, a pattern we’ve been witnessing in other markets overseas. Today, it is simply not sufficient to claim a commitment to responsible investment without the evidence to back it up,” she said.

Global markets have moved rapidly to lift expected standards of practice in responsible investment in the last two years and Australia is no exception, from greenwashing guidance to standardisation of ESG product labelling and the development of green taxonomies to formalised stewardship codes.

ESG considerations, across the board, are being hardwired into financial market laws and regulation, including the recent amendments to APRA’s superannuation fund trustee guidance.

“These policy efforts and elevating industry standards have started to separate the leaders from the pack, as a sign of a rapidly maturing and professionalising market. In 2023, there were a total of 77 responsible investment organisations attaining the high standards of responsible investment against RIAA’s scorecard, up from 74 in the previous year,” said Estelle.

“In 2022 it was a challenging investment market for responsible investors, with a period of significant growth for the mining and energy sectors, which are typically sectors responsible investors have a lower exposure to particularly as they move to lower the carbon intensity of their portfolios,” said Estelle. This year’s report shows some underperformance of Certified Responsible Investment Products over one year, however performance over the medium and long term periods stayed on par with or better than benchmarks, with particularly strong results across managed growth funds.

The report also revealed, a strong uptake in capital flowing to more sustainable investments in 2022 with sustainability-themed investments having grown by 46% to reach $235 billion, including almost $30 billion in sustainability-linked loans and $80 billion targeting climate change areas like renewable energy, human rights, biodiversity and sustainable water management.

“Investors are keen to see action on climate and other sustainability-related issues, and want to make sure that their investee companies are not greenwashing. So they’re using their ability to engage and vote to make sure claims are backed up by action. If you’re going to make a net zero commitment, this needs to be backed up by a clear and achievable plan,” said Estelle.

This year RIAA’s Responsible Investment Scorecard was refined, and the standard set higher, to reflect evolving expectations of responsible investment leadership both domestically and internationally.

Not only is the number of investment managers paying attention to responsible investment growing, but they are also getting better at it. The number of fund managers who were able to attain the highest responsible investment standard against RIAA’s scorecard reached a record 77, signalling a strengthening of approaches by more market participants.

“This reflects a new level of awareness surrounding responsible investment, whereby nearly all professional investment managers are focused on responsible investment, but that’s no longer sufficient to be classed as a leading responsible investor in a world of rapidly lifting standards. What was once considered leading practice in Responsible Investment is now the baseline, with stewardship setting responsible investment leaders apart,” said Estelle.

“Investors have an increasing influence on shaping the future of companies, and ensuring there is greater support for initiatives across climate change and human rights. Recent litigation by ASIC, towards companies engaging in greenwashing, is a clear sign that ESG is no longer a tickbox that can be utilised for marketing, as investors now expect transparent and quantifiable action on social and environmental issues,” said Estelle.

“While economic uncertainty and market volatility has undoubtedly impacted responsible investing in Australia, our research has uncovered tremendous growth in capital which has been earmarked to support sustainability themes. It’s now critical that the government seizes this opportunity to tap this tidal wave of green capital ready to be put to work to drive the low carbon transition. The soon to be released Sustainable Finance strategy by the Treasurer has the potential to both continue to lift standards in responsible investment, while also unlocking capital to help accelerate the transition.” said Estelle Parker, Executive Manager, RIAA.

Emma Herd, Partner, Climate change and Sustainability Services, EY Australia, Co-Lead of EY Net Zero Centre, said responsible investment in Australia in 2022 moved into a new phase, one characterised by the ever-increasing expectations for transparency and performance.

“The bar keeps rising and what was considered leadership even a few short years ago is now business as usual. Heightened scrutiny is generating new caution for funds making sustainability claims. But the need to drive more capital into sustainable outcomes is critical if we are to adequately respond to the biggest social and environmental challenges of our time. Growing the pool of funds managed must, and will, continue to accelerate,” she said.

Key findings

• 93% of all professionally managed funds in Australia are now managed by investors with a public commitment to responsible investment.
• Australia’s responsible investment market is valued at $1.3 trillion in 2022 or 36% of the market made up of those demonstrating a strong and comprehensive approach to responsible investment.
• A new threshold for Responsible Investment Leaders led to 54 fund managers named as Responsible Investment Leaders, and 23 fund managers awarded the new Responsible Investor designation.
• Money is flowing to outcomes for people and planet, as investments into sustainability themes increased substantially in 2022, reaching $235 billion (from $161 billion in 2021).
• The impact investment sector nearly doubled from $30 billion in 2021 to $59 billion in 2022.
• Norms-based screening is soaring in popularity, increasing by 85% to $255 billion as responsible investment managers mature and adhere to global norms like the Paris Agreement and the United Nations Declaration on the Rights of Indigenous Peoples.
• The performance of RIAA certified funds consistently stays on par or better than benchmarks over medium and long term periods, with managed growth funds particularly excelling.
• Natural capital is emerging as an increasingly popular positive screening theme, with 46% of survey respondents screening for biodiversity preservation and conservation, while climate change-related issues continue to be a priority.
• Responsible investors are responding quickly to new sustainability reporting and taxonomy guidance overseas, with many domestic and international fund managers reporting a more conservative number of responsible investment assets for 2022, a sign of an industry and regulatory efforts to tighten standards.

Read the report.

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Emma Herd

Quantitative equities investment boutique Redpoint Investment Management has become a member of the Investor Group on Climate Change (IGCC), a collaboration of Australian and New Zealand investors focusing on the impact climate change has on the value of investments.

Redpoint IM chief executive officer, Max Cappetta, said membership of IGCC is a logical step for the firm. The Sydney-based asset manager is already a signatory to the United Nations Principles for Responsible Investment (UN PRI) and has a research framework compatible with the reporting framework of the Global Reporting Initiative (GRI).

“We are continuously developing our reporting to highlight changing climate risks for clients, including monitoring how companies are managing their environmental practices, and the way they are addressing emissions reduction, resource utilisation and product innovation, for example.

“Our membership to IGCC comes at a critical time globally for climate change policy, and for climate action within investing. Our investment team has always considered sustainability as an important investment driver and climate change is core to this perspective. The investing world is transitioning from policy development to implementation and we want to play our role in supporting investors to build better portfolios,” he said.

IGCC chief executive officer, Emma Herd, said: “We are delighted that Redpoint IM has joined as a member of IGCC and look forward to the practical insights and experience the organisation will bring to our agenda.

“Climate change poses systemic risks to financial markets and creates significant challenges for investors. At the same time the inevitable transition to net zero emissions is driving enormous new investment opportunities. Collaboration across the industry is critical to ensuring all investors are best equipped to minimise these risks, capitalise on these opportunities and have their voice heard in climate policy debates.”

IGCC represents institutional investors who combined have total funds under management of over $2 trillion. The organisation aims to encourage government policies and investment practices that address the risks and opportunities of climate change, for the ultimate benefit of superannuants and unit holders.

Membership of the IGCC is open to investors operating in Australia and New Zealand including superannuation funds, insurance companies, fund managers and other financial services providers, such as asset consultants, brokers and investment industry associations.

Redpoint IM specialises in quantitative strategies across Australian equities, global equities, global infrastructure and global property. Across its investment strategies and funds, the manager applies a proprietary sustainability framework underpinned by environmental, social and governance (ESG) as a measure of sustainability.

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Jacki Johnson

The leaders and senior executives of Australia’s major banks, superannuation funds, insurance companies, financial sector peak bodies, civil society and academia are coming together to set out a roadmap for realigning the finance sector to support greater social, environmental and economic outcomes for the country.

The Australian Sustainable Finance Initiative has today been unveiled – an unprecedented collaboration to help shape an Australian economy that prioritises human wellbeing, social equity and environmental protection, while underpinning financial system stability, in what it says is a ‘critical decade’ ahead.

Modelled on international best practice already seen in groups including the European Union’s High-Level Expert Group on Sustainable Finance and the UK’s Green Finance Taskforce, the Australian Sustainable Finance Initiative will be guided by a Steering Committee charged with developing a set of recommendations to enable the finance sector to contribute more systematically to the transition to a more resilient and sustainable economy.

IAG Group Executive Jacki Johnson, co-Chair of the Initiative, said: “The roadmap we create will include pathways, policy signals and frameworks that will better enable the financial services sector to contribute to delivering on international commitments, such as the Paris Agreement on Climate Change and the UN Sustainable Development Goals, while underpinning economic stability and prosperity for Australia.”

An Australian Sustainable Finance Roadmap will be delivered by the Steering Committee in 2020 with recommendations that will assist the financial services sector to:

1. Mobilise capital to deliver on national and global sustainable development and climate goals;
2. Enhance the sustainability, resilience and stability of the financial system by embedding sustainability, climate and human rights considerations into financial markets and products;
3. Ensure better informed financial decision making by enhancing disclosures and transparency on environmental, social and governance risks and opportunities; and
4. Deliver a financial system that meets community expectations around sustainability.

An Expression of Interest process in late 2018 called on experts active in sustainable finance to nominate to be part of the Steering Committee.

The following members and observers were appointed

Members

• Anna Skarbek, CEO – ClimateWorks
• Christina Tonkin, Managing Director Loans and Specialised Finance – Institutional – ANZ
• Damien Walsh, Managing Director – Bank Australia
• David Atkin, CEO – Cbus
• Didier Van Not, General Manager Corporate and Institutional Banking – Westpac Banking Corporation
• Emma Herd, CEO – Investor Group on Climate Change
• Eric Williamson, Executive General Manager, Corporate Finance – National Australia Bank
• Jacki Johnson (Co-Chair), Group Executive People, Performance and Reputation – IAG
• John Hewson, Chairman – Business Council for Sustainable Development Australia
• Mark Joiner, Chairperson – QBE Australia Pacific
• Mark Senkevics, Managing Director Head Australia and New Zealand – Swiss Re
• Matthew McAdam, Director Asia Pacific – Principles for Responsible Investment
• Michael Thorpe, Managing Director Institutional Banking and Markets – Commonwealth Bank of Australia
• Phil Vernon, Managing Director – Australian Ethical Investment
• Richard Brandweiner, CEO – Pendal Group
• Robynne Quiggin, Professor – University of Technology Sydney, Business School
• Sarah Barker, Special Counsel – Minter Ellison
• Simon O’Connor (Co-Chair), CEO – Responsible Investment Association Australasia

Observers

• Geoff Summerhayes, Executive Board Member of APRA, Executive Committee Member of the International Association of Insurance Supervisors and Chair of the Sustainable Insurance Forum.
• Eric Usher, Head of the UN Environment Program Finance Initiative, Economy Division, UN Environment

Simon O’Connor, Initiative Co-Chair and CEO of the Responsible Investment Association Australasia (RIAA), says “Issues such as climate change and human rights have become material to business and the financial services community. Climate change was recently described by the Deputy Governor of the Reserve Bank of Australia as a ‘systemic risk’ to the stability of our economy, and APRA emphasised last week that climate risks are ‘material, foreseeable and actionable now’ ”.

“The financial services sector is both exposed to those risks, as well as having an essential role in funding and underwriting a future Australia, providing the capital necessary to deliver on sustainable development and climate-related commitments. Through a greater alignment between the financial services sector and these sustainability goals, the sector can both deliver for Australians while building a better, more stable and sustainable financial system.”

“This unique and high-level collaboration will set out a roadmap for achieving this goal and shows the willingness of the financial services sector to step up and play an active role in building a more sustainable and resilient economy for all Australians,” said Mr O’Connor.

Jacki Johnson says “a sustainable and resilient economy is a necessity, not an option, and is the foundation for ensuring Australia’s prosperity throughout the 21st century.”

“As we approach 2020, we are rapidly entering a critical decade for managing climate change and other risks,” said Ms Johnson.

“Australia has made a number of commitments to international targets. Achieving these goals extends beyond social or environmental objectives – it’s an economic and financial necessity. Our economy simply cannot prosper in an environment of ever-increasing severe weather events and the subsequent broader impacts these will have.”

“Delivering on these goals requires not just government policy and commitment, but business and finance leadership. Achieving these goals presents a sizeable economic and social opportunity.”

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Tim Andrews

The Actuaries Institute has launched a climate index, an objective measure of extreme weather conditions and changes to sea levels, to help policymakers and Australia’s businesses assess how the frequency of weather extremes is changing over time.

The Australian Actuaries Climate Index, which includes a number of sub-indices, tracks changes in the frequency of extreme high and low temperatures, heavy precipitation, dry days, strong wind and changes in sea level, mainly concentrating on the 99th percentile of observations. The components of the index were chosen due to their link to risk, an area of expertise for actuaries, and because extremes have the greatest potential impact on people and, often, the largest cost to the economy.

The index is the culmination of an extensive research and implementation process. It is the result of consultation with Australia’s Bureau of Meteorology, Commonwealth Scientific and Industrial Research Organisation (CSIRO), leading insurance and natural hazard scientists and regulators.

“The index is designed to help us understand how extreme weather, and hence risk levels, may be shifting as a result of climate change,” said Tim Andrews, a Principal at Finity Consulting. Mr Andrews, who has 30-years of actuarial experience, collated the index, using data from the Bureau of Meteorology’s extensive network of weather stations and tide gauge facilities. The data was collected nationally and grouped into 12 climatically similar regions.

“This index is a very important piece of work for the Actuaries Institute,” said Institute President Barry Rafe. “Actuaries are skilled at summarising and presenting complex data, and the assessment and management of the financial consequences of risks.”

“This project aims to help big and small corporations better understand the changes in weather extremes across Australia. It is one way to bring science and business together.”

Actuaries Institute Chief Executive Elayne Grace said: “This work will assist businesses to assess and report risks from climate change, and Australians more generally will be able to look at the data and see what’s going on.”

Australian financial institutions can reference the index to help them meet their commitments to adopt international risk reporting measures, Ms Grace said. The Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures in 2017 wrote recommendations for a single international cross-industry standard for disclosing those risks.

The Australian Prudential Regulation Authority (APRA), which last year warned that the risks of climate change were “foreseeable, material and actionable now”, has welcomed the new index.

APRA Executive Board Member Geoff Summerhayes said: “APRA has a longstanding working relationship with the Actuaries Institute, collaborating on financial risk metrics and standards. We believe this initiative is a positive step towards helping regulated entities to understand and manage the potential impact of climate risk on their businesses.”

Chief Executive Officer of the Investor Group on Climate Change, Emma Herd, said: “The effects of climate change are here and now, and getting worse.”

“Australian investors are looking for the tools they need to better assess and mitigate physical risks for their investments. The Australian Actuaries Climate Index is a welcome new tool for managing climate risk.”

The IGCC represents Australian and New Zealand institutional investors with around $2 trillion in funds under management, and others in the investment community concerned about the impact of climate change on investments. The very first Australian Actuaries Climate Index report, to be issued November 12, which covers the period 1981 to 2018, shows the frequency of extreme conditions in Autumn 2018 was higher than the historical extremes for Autumns in the baseline period from 1981-2010.

In fact, the frequency in the baseline period has been exceeded in every season but one since 2010. The results are compared to a 30-year reference period, mostly focusing on the 99th percentile of observations. The index will be updated each quarter.

The Australian index was built following the establishment of a similar tool in the United States and Canada that tracks different components to measure risk and climate change. That index, published quarterly, measures the frequency of extreme weather and the extent of sea level change. The US/Canada index is supported by a number of actuarial groups, including the American Academy of Actuaries and the Society of Actuaries.

The Actuaries Institute plans to develop more explicit measures of risk and the climate index represents the first phase of that work.

“This is a first step,” Ms Grace said. “We hope to build on this index by attaching risk data, such as damage to property and health statistics, in order to understand the relationship between weather extremes and risk, enabling more explicit risk indices to be developed.”

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