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Insto demand fuels growth in local responsible investment market
Demand from institutional investors was the main driver of growth in Australia’s responsible investment (RI) market in 2023, as the industry continued to gain momentum.
More than half of respondents (53 per cent), up from 48 per cent in 2022, considered institutional demand as a key contributor to the market’s expansion, according to the Responsible Investment Association Australasia (RIAA).
In its annual Responsible Investment Benchmark Report, RIAA said that while institutional demand and expectations of improved long-term performance or risk mitigation fuelled growth, escalating greenwashing concerns also rose. In 2023, 52 per cent of respondents cited greenwashing as a top issue, compared to only 45 per cent in 2022.
This was in line with global trends, RIAA said, as greenwashing remained a significant barrier to responsible investing, contributing to reduced allocation of capital in European sustainable investment products and net outflows in the US sustainable investment market.
Additionally, Australia’s 2023 budget allocated $4.3 million to the Australian Securities and Investments Commission (ASIC) to investigate market participants “engaging in greenwashing and other sustainable finance misconduct”.
Interestingly, performance concerns eased last year in Australia to 45 per cent from 52 per cent in 2022, suggesting a higher confidence among investors that RI strategies could deliver competitive returns.
“While the decrease is welcome, it still indicates that returns-related apprehensions remain a barrier,” the report said.
According to the report, the performance of responsible investment products remained strong, with a 24 per cent growth for RIAA-certified products to $167.7 billion in AUM.
Data showed that a 10-year return for responsible investment products delivered 13.9 per cent in 2023, outperforming a 9.19 per cent return for the rest of the market, including Australian share funds.
Estelle Parker, co-CEO of RIAA, described the growing confidence as “encouraging”, saying that responsible investment and profitability can “go hand in hand”.
“Now, the focus is on proving impact, adapting to feedback, and consistently driving the positive outcomes we know responsible investing can achieve,” she said.
Other concerns, such as ‘lack of understanding or capacity to apply RI’ and ‘risk concerns’, saw notable drops in 2023, to 17 per cent from 26 per cent and to 12 per cent from 21 per cent, respectively.
New heights
After an anomaly in 2022 and, despite a general slowdown in global economic growth, Australia’s responsible investment landscape reached new heights in 2023, in both size and quality, reaching $1.6 trillion in AUM, up from $1.3 trillion in 2022.
“This growth reflects both an increase in the number of investment managers implementing RI strategies and a rise in the average AUM allocated to responsible investments,” the association said.
Total managed funds stood at $3.9 trillion, with the proportion of RI AUM climbing from 36 per cent to 41 per cent.
The number of responsible investors rose by 26 per cent and the proportion of responsible investment AUM went up from 35 per cent in 2022 to 41 per cent of the market, signalling “a powerful shift towards mainstreaming responsible investment across the market”.
There were also 291 professional investment managers actively engaged in responsible investment practices, up from 272, and fund managers meeting RIAA’s RI threshold increased to 90, up from 77 in 2022.
Parker, who described it as “a pivotal moment for the industry”, said: “Our data shows that 99 per cent of respondents now integrate ESG principles into their framework, embedding responsible practices into the fabric of their operations.
She said that regulators were ‘rightfully’ pushing for greater transparency, and that “the public wants proof that investment claims lead to real-world impact”.
“Credibility in responsible investment depends on demonstrating measurable, impactful action, not just good intentions,” she said.
Impact investing
In impact investing, clean energy remained a leading theme, attracting $3.1 billion in AUM, and was followed by climate change mitigation, which managed to attract $2.03 billion.
In 2023, there was a rise in investor engagement on non-climate sustainability issues, with the most significant increases observed in engagement on Indigenous rights and cultural heritage protection (56 per cent), natural capital (48 per cent), and education (30 per cent).
RIAA attributed this to a broader commitment to addressing ‘diverse social and environmental challenges’.
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