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Regulatory crackdown on “greenwashing” is giving investment managers and superannuation funds cold feet on making claims about investing responsibly, especially if such claims cannot be substantiated.
The domestic responsible investment market was valued at $1.3 trillion at the end of 2022, a 16 per cent decrease on the previous year, in the latest annual Responsible Investment Benchmark Report by the Responsible Investment Association Australasia (RIAA).
Responsible Investing Association Australasia’s Simon O’Connor says funds have been responding to increased regulator scrutiny of their ethical claims.Credit: Renee Nowytarger
Some of that slump can be attributed to the relatively poor performance of sustainable funds during 2022, with listed companies in the mining and energy sectors, in which sustainable funds underinvest, doing well.
However, it is also that some managers, particularly international investment managers, reported a smaller portion of their total funds under management as being invested using ethical, social and governance (ESG) principles, says Simon O’Connor, the chief executive of the RIAA.
“Evolving standards and increased regulatory scrutiny have led to a tightening of definitions of responsible investment by some large international investment managers,” O’Connor says.
The Australian Securities and Investments Commission commenced a review of investment managers and their green claims in 2022. The regulator has commenced court actions against superannuation funds that it alleges have engaged in greenwashing.
O’Connor says investment managers in Australia are refining their communications about the extent and coverage of their ESG or responsible investment policies and practices.
“For example, some funds provide greater detail, clarity or context around the coverage of ESG or responsible investment policies,” O’Connor says.
This may involve limiting coverage to specific asset classes, such as listed equities, or portfolios that the fund manages directly, rather than claiming overall coverage of ESG or responsible investment policies, he says.
O’Connor says it is sign of an industry that is maturing. “The positive outcome of all of this is that consumers will be able to have much greater confidence in the claims made by super funds and managed funds as a result of higher standards,” he says.
Consumer research released in 2022 by the RIAA showed the extent to which concerns over greenwashing among retail investors who invest ethically, or plan to invest ethically, had become top-of-mind.
Almost three-quarters of those who already had responsible investments and four of five Australians who were considering investing in responsible investments in the next 12 months said they were concerned about greenwashing.
“ESG is no longer a tick-box that can be utilised for marketing, as investors now expect transparent and quantifiable action on social and environmental issues,” says Estelle Parker, executive manager of the RIAA.
“Today, it is simply not sufficient to claim a commitment to responsible investment without the evidence to back it up,” Parker says.
The RIAA report shows that despite the underperformance of ethical funds during 2022, their returns are higher than mainstream funds over three, five and 10 years in almost all categories of investments.
For the 10 years to the end of 2022, ethical multi-sector growth funds with RIAA certification produced an annual average compound return of 16.28 per cent, compared to 10.28 per cent for mainstream multi-sector growth funds.
The report covers fund managers and superannuation funds and also “wholesale” fund managers, those whose funds are not offered directly to the public.
They can be based in Australia or overseas, but make their investments available locally.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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