Responsible Investing: Australian Engagement With ESG and Global Perspectives

Despite of, or perhaps because of, the COVID-19 pandemic, interest in responsible investing has increased.

Investors are now three times more likely to say that responsible investing will soon become the norm and indistinguishable from mainstream investing¹.

More investors are now pursuing responsible investments. This includes establishing or reviewing responsible investment policies, hiring professionals dedicated to responsible investing and increasing allocations to responsible investments.

ESG interest is growing in Australia and across the world

In Australia of course, the majority of people of working age have investments through their super funds.

Some may say Australian companies are behind others in the world in relation to ESG investments, however we are on the path and as momentum builds and consumers demand companies show what they are doing in this area we could see change speeding up.

In Aon’s third Global Perspectives on Responsible Investment report, which explores evolving attitudes, behaviours and investment choices of institutional investors globally, engagement with responsible investing through ESG integration has doubled since 2019 (41 per cent to 80 per cent)².

Pleasingly, more than two-thirds (69 per cent) of respondents with exposure to responsible investments are satisfied or very satisfied with their returns to date.

The term ESG (environmental, social and governance) was first used in 2005, however, the idea really only became popular since 2019 and now we have found if you do not have an ESG approach you will lose relevance.

Although ‘socially responsible investing’ (SRI) has been around for a while, it wasn’t particularly popular in the mainstream mostly due to the belief that SRI generated lower returns. However, this belief has changed in the last few years and particularly through the COVID-19 pandemic.

The top concerns for responsible investing

Among survey respondents, climate change (61 per cent), for example, is perceived to be the most pressing global trend from an investment perspective.

It is noted that events such as the UN’s Climate Change Conference (COP26), and comprehensive scientific reports tracking year-on-year changes, such as the Assessment Reports from the Intergovernmental Panel on Climate Change (IPCC), are shining a spotlight on shared global challenges, such as climate change.

Socioeconomic inequality (27 per cent) comes in second as a global trend, while the increasing incidence, scale and sophistication of ransomware attacks, often targeting critically important companies in sectors like infrastructure, agriculture and healthcare, put cyber risks and artificial intelligence into the number three spot (25 per cent).

ESG in Australia

80 per cent of respondents globally say that responsible investment considerations play an important or very important role in their investment decision-making. And a further 10 per cent say it is mission critical.

These results suggest that investors continue to recognise the influence of their investment choices and how these intersect with risk management, in the case of ESG, or with their long-term mission and values for other responsible investment strategies.

Australians overall are becoming more interested as they realise the importance of changing to improve future outcomes and this doesn’t have to be at the expense of performance.

Actually, there is mounting evidence that companies who adopt, live and breathe their ESG policies will outperform as they meet the demand of the consumer and investor and find better and more sustainable ways of doing things.

This trend is becoming embedded across Australia in different ways. For example, 76 per cent of 200 ASX firms had a reconciliation plan endorsed by Reconciliation Australia. A Reconciliation Action Plan sets out a company’s commitments or policies on how support will be provided to Aboriginal and Torres Strait Islander peoples and their human rights³.

Looking to the future of responsible investing

66 per cent of respondents to the global survey state they have some of their portfolio allocated to responsible investments, with many more intending to increase future allocation.

Millennials (aged 26 to 41) have been more focused on socially responsible investing than previous generations, partially due to their access to more information in their formative years, and Gen Z (25 and under) seems to be following similarly.

Data and analytics tools and platforms are also assisting investors to determine their portfolio’s ESG impact or otherwise, which will grow in importance as ESG matters grow in consideration for investors.

With millennial wealth increasing and Gen Z starting to buy and invest based on their ESG factors means that companies will need to provide products and services to meet these needs.

Knowledge of ESG and the benefits of a sustainable tomorrow are becoming more well known to older generations as well and they will also increase demand for ESG strategies.

Anecdotally, we also see that at the various annual member meetings the most common questions by members to the superannuation trustee relates to responsible investing.

Robust due diligence, strong governance and transparent decision-making lie at the heart of a well-managed portfolio. In Australia, whether they are super fund members or investors, we see this being embraced in greater levels than ever before.

References

¹ Aon’s Global Perspectives on Responsible Investment report 2022

² Aon’s Global Perspectives on Responsible Investment report 2022

³ ESG Reporting Australia 2021, PWC https://www.pwc.com.au/assurance/esg-reporting-australia-2021.pdf