Aussie responsible investment leaders weakest on ‘real world outcomes’

Leading responsible investors in Australia are “weakest” on asset allocation, with none scoring top marks on metric assessing how they are “contributing to real-world outcomes” through their investments.

This is the finding of the latest annual responsible investment benchmark study by Australian sustainable finance body, the Responsible Investment Association Australasia (RIAA).

Of the 140 investment managers assessed, more than half (74) were judged to be “Responsible Investment Leaders”. By contrast, last year 27 percent (54 out of 198) were awarded this status.

To be regarded as a Leader, investors must score 15 or more out of 20 against the RIAA’s scorecard, which is composed of four equally weighted pillars.

Aviva Investors Pacific, Axa Investment Managers (Asia), UBS Asset Management and Northern Trust were among the asset managers included in the Leaders category. They were joined by asset owners including Active Super, AustralianSuper and HESTA.

The fourth pillar assessed allocation of capital “to benefit stakeholders and contribute to solutions as well as measuring and reporting outcomes”. It includes considerations such as how managers report on the positive social and/or environmental outcomes achieved through their investments.

The RIAA revealed that scoring against the outcomes pillar was the weakest again this year. “Similar to last year, the area where performance of both Leaders and non-leaders was weakest was the allocation of capital to responsible investment (Pillar 4),” it wrote.

Zsuzsa Banhalmi-Zakar, research manager at RIAA and one of the report’s authors, revealed that none of the investors assessed achieved maximum points on Pillar 4. However, 43 percent did score between 4-4.99, 30 percent scored 3-3.99, 23 percent scored 2-2.99 and three out of the 74 scored 1-1.99.

RIAA also revealed that it changed the criteria for Pillar 4 this year given the “poor performance” last year, in an attempt “to better understand impact measurement and outcome practice”.

The revisions were intended to drive a shift towards determining managers’ intention “to create positive outcomes or impacts, measurement of change or impact (eg, against extra-financial targets) and reporting”, RIAA explained.

Commitment to responsible investment (Pillar 1) was where both Leaders and non-leaders scored highest again this year, with an average of 4.73 among the former and 3.07 the latter. Pillar 4, by contrast, averaged 3.36 among Leaders and 1.08 among non-leaders.

Overall, the RIAA estimated that Australia’s responsible investment market had reached a record A$1.5 trillion (€1 trillion; $1 trillion) or 43 percent of total professionally managed funds in 2021, up from A$1.28 the year before.

The top responsible investment approach employed was ESG integration, covering A$752 billion, followed closely by corporate engagement and shareholder action (A$726 billion).

On engagement, the report found a “significant change” in the proportion of investors reporting on both their activities with firms and the outcomes. RIAA reported that 45 percent of managers are now reporting on engagement and outcomes, compared with 31 percent in 2020.

When asked if the RIAA has any minimum standards when it comes to what it classes as engagement, Banhalmi-Zakar told Responsible Investor that it doesn’t distinguish “based on level of engagement”.

“Our scorecard awards differential marks based on whether investment managers report on their corporate engagement activities or outcomes (lower) as opposed to both activities and outcomes (higher) or none at all (zero). We look for public disclosure of these activities,” she said.

The RIAA report also identified “remarkable growth” in sustainability-themed investments in 2021, with A$161 billion dedicated to such strategies in compared with A$76 billion in 2020.

Climate change (renewables, energy efficiency) topped the list, with waste management, zero waste and circular economy in second, and sustainable forestry, land management and agriculture in third.