Responsible investing in Australia continues to climb, with demand from institutional investors a key driver of growth.
But concerns about greenwashing have increased, and the return of Donald Trump has raised questions over sustainability as an economic priority.
Estelle Parker, co-CEO of the Responsible Investment Association Australasia, talks to Sean Aylmer about the growth and performance of the industry, and why more institutional investors are turning to responsible investments.
Responsible Investment Association Australasia is a supporter of this podcast. This is general information only. You should seek professional advice before investing.
Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. Responsible investing in Australia continues to rise, with demand from institutional investors a key driver of growth. At the same time, concerns about greenwashing within the industry have increased about countering that is, a greater commitment to transparency within portfolios. These are some of the headline findings of the Responsible Investment Benchmark Report, highlighting not just the size of the industry but also some of the challenges ahead. Estelle Parker is the co CEO of the Responsible Investment Association Australasia, which is the great supporter of this podcast. Stelle, Welcome to Fear and Greed.
It's great to be with you, Sean.
So just how big has responsible investing become in Australia.
Look, it's basically mainstream, I would say. When you think about the breadth of responsible investment approaches, everything from integrating environmental, social and governance factors into investment meant decision making right through to the real point end of responsible investment. We're seeing the vast majority of fund managers in Australia adopting one of those approaches and our recent benchmark report, as you noted, shows the growth in the market we're seeing, in particular ESG risk considerations being really key. So eighty one percent of managers are incorporating ESG integration into their decision making. So it's really wonderful to see year on year growing. The market itself at the moment has grown to one point six trillion in Australia and in New Zealand sitting at about two hundred and seven billion dollars, and a lot of drivers of that include things like the strength and regulatory framework, definitely increased investor demand, but also expectations of consumers.
It's kind of how long is a page of strings sometimes with responsible investing because how you define it and we can talk about ESG and stuff like that, but is there kind of for people like myself an easy way of understanding what does fall under responsible investing and what doesn't.
Sure Look, there is a spectrum of responsible investment approaches, but at its core it is factoring in considerations around society and the environment as well as governance factors along with financial performance in investment decision making. So, as I said, you know, considering environmental, social and governance risks. So looking at you know, what are the risks that the current energy transition, for example, may have on an asset, and how do you reduce that risk? You know, may maybe by reducing reliance on fuels, improving energy efficiency and so on. But other strategies include things like screening investments by applying rules and a very popular one, of course, is screening out fossil fuel investments from a portfolio, or even you know, ensuring that all companies in a portfolio have a robust net zero strategy, for example. And then there's something called thematic investing, which is where you actually proactively construct a portfolio in order to access certain benefits from trends like a renewable energy portfolio, or even constructing a portfolio to benefit from say an aging population for example. So looking at those kind of long term mega trends. Then, as I said, impact investing, is that really pointy and where you've got this really strong intention to generate really positive and measurable social and environmental impacts, but that needs to be alongside a financial return, and that's things like you know, social housing is a very popular one. And of course throughout all of that we've got something called stewardship, which is using investor rights and influence by say voting at agms or engaging in investing companies to improve performance. But that's all of that is looking at delivering a really strong financial return.
Okay, I want to take those two separately. Impact investing, how are we going in terms of growth of that, because it has been a difficult one to stand up for many companies that we seem to be doing better.
Well, we are doing better, and I think impact investing is still quite nascent in Australia. It's growing off a very low base, but interestingly, the institutional investors are starting to look at this, so they're standing up, you know, within the asset owners, their own teams, looking at delivering impact, often at the kind of due to the demand of their consumers and their members. So I can't recall the exact figures, but that is something that everybody should be really cognizant of because there are some really fantastic opportunities in the impact investing space that do deliver returns very distinct of course from philanthropy. And I would also say just on impact investing, you know, there's some really interesting innovative partnerships with NGOs in the social housing space, in the green space, the nature and biodiversity protection space. So that is definitely an area to watch stewardship.
That's something which seems to have gained increasing popularity in the last couple of years because you're not screening out stocks necessarily, but you're using your power as a shareholder to potentially influence how management is thinking. The great thing about that is that you can potentially maybe you can never own a cold company, I'm not sure, but you might be able to own some certain energy companies who are going through a transition. Just sort of explain how that works within this framework.
Look, you mentioned the energy transition and climate change is we're seeing eighty six percent of investment managers those that are using engagement and voting as an investment strategy. Climate change is the issue that they are all looking at, but also things like diversity, looking at their gender balance and so on on boards, and issues like human rights and that's modern slavery, that's looking at indigenous cultural heritage protection, and then as well as that general kind of environment and tal concerns and ensuring that biodiversity and nature are protected, and that is you know everything, as you say, from voting at agms, using the influencer that they have, but also having meetings engaging with companies, and that is becoming much more robust. I would say, So it's no longer good enough to say as an investor, I've just sent you know, a bunch of letters to you know, a bunch of companies that were invested in to tell them that they should have better diversity on their board or that they should have a good net zero strategy. But they're actually following up and they're reporting to their members and consumers as well on the kinds of activities, and we're seeing a lot more transparency as well in voting practices.
Stelle, I still want to talk to you about greenwashing, green hushing, a few other challenges for responsible investing. Will do that after this break. I'm talking to Estelle Parker, co C of the Responsible Investment Association Australasia. The report talks about green washing or green hushing. Can you define those and just how big a challenge is it for the industry.
Sure? Look, greenwashing itself is essentially overstating the environmental or social benefits of an investment, and as we know, the regulators really have been cracking down over the past couple of years, and this is a good thing because we want the claims that are being made out there to consumers where there is a huge demand for investments that are responsible and that also have positive impact. But consumers themselves are telling us that they are concerned about green washing in the sector. They're also telling us through our consumer surveys that they are much more likely to invest in a product that has been verified by a third party. So Rea itself we run a responsible investment certification program where we really comb through those products and make sure that they are what they say they are on the label. You know, it's not much different to a tin on something on the supermarket shelf tin ofbate things. You expect what's in the tin to reflect the same as what's on the label. And so the industry has responded to the regulator signaling. We're seeing a very strong pipeline of products coming to us for responsible investment certification and I think as well, you're right, green hushing is a bit of an issue, and we have seen some funds pulling back a little bit from claims that they are making in order to ensure that what they are saying accurately reflects exactly what they are doing. So you really do need to substantiate claims.
Okay, there's been a number of high profile cases of alleged green washing, Like that's not necessarily a bad thing because it actually makes puts everyone else on notice.
Look, I know when our sick put out their first guidance a couple of years ago on greenwashing, which was essentially clarifying. It's not like a whole lot of new greenwashing legislation came up. It was clarifying existing consumer law and the expectation of investors under that consumer law. And we do know that funds kind of went away and had a really good look at what was in the marketing material compared to what was in their legal documents, and then comparing that to their portfolio holdings. And so I think the industry now definitely understands that it's no good just to make claims and not doing anything about them. You really need to back up those claims with robust strategies and practices, and you also need to be really transparent about that.
The report focuses on where we've been it is a new world. From January sixth and Donald Trump's administration obviously has made lots of noises around some of these issues. Do you think in Australia it will matter?
Look, good investors think long term, right, So, as we've just been talking about consumer awareness and demand for this stuff is growing, responsible investors under stand that you need to think long term and that good responsible investment, including ESG integration, but also thinking about longer term trends and trying to access those opportunities makes really good business sense. So the political environment obviously has been raised by some We see geopolitical risk, we see performance concerns across the board all the time people are considering this stuff, But good investors think long term performance is very very good. It has been very good for the products that reascertifies over quite a number of time periods and over quite a number of years, we see certified funds perform on par with all better than the rest of the market, and the most recent data that shows that they are outperforming on one year, five year, and ten year periods, which results do vary quite widely by asset classes. We're also seeing globally. Morning Star Direct has basically said that over the past decade to twenty twenty five, the top twenty sustainable funds globally have garnered a really positive average return of over thirteen point five percent. So you know, smart people are looking this at this They're thinking much longer term than a four year presidency, and that obviously allows them to consider, you know, where we're going globally and filter out the noise.
Selle, thank you for talking to Fear and Greed.
It's been a great pleasure, Sean.
That was a Stelle Parker, co CEO of the Responsible Investment Association Australasia, which is a great supporter of this podcast. This is the Fear and Greed Business Interview. Remember this is general information only and you should seek professional advice before investing. Join us every morning for the full episode of Fear and Greed, the daily business news for people who make their own decisions. I'm Sean Elmer. Enjoy your day.