Scrutiny adds to barriers to sustainable investing

Investments are flowing into companies that avoid harming people and the planet, but there is room for improvement, according to a report by ethics experts.

Economic uncertainty, market volatility and tighter regulation here and overseas have hit responsible investment in Australia, according to the Responsible Investment Benchmark Report.

The study released on Monday by the Responsible Investment Association Australasia (RIAA) reveals that environmental, social and governance (ESG) considerations are increasingly deeply embedded in investment markets.

“Natural capital” is emerging as an increasingly popular theme, with almost half (46%) of respondents considering possible investments for the preservation and conservation of biodiversity, while climate change remains a priority.

But increased attention from regulators to corporate sustainability claims has put domestic and international fund managers on notice.

EY Australia partner Emma Herd said responsible investing has entered a new phase as the bar continues to rise on expectations for transparency and performance.

“Increased scrutiny is generating new caution around funds that claim to be sustainable,” she said.

“But the need to mobilize more capital to achieve sustainable results is essential if we are to adequately respond to the greatest social and environmental challenges of our time. »

Around 93 per cent of Australia’s professionally managed funds, worth $3.3 trillion, are managed by investors publicly committed to so-called responsible investing.

But the size of the responsible investment market stood at $1.3 trillion at the end of 2022, down 16% from the previous year.

According to the study, questions regarding financial performance remain the main obstacle to the growth of responsible investment.

Concerns about greenwashing, or exaggerated claims, have risen significantly to become the second biggest concern as regulators crack down on false sustainability credentials.

In July, the Australian Prudential Regulation Authority released guidelines for superannuation trustees following two years of consultation and reforms aimed at strengthening investment governance practices across the industry.

RIAA spokeswoman Estelle Parker said recent policy efforts and higher industry standards have begun to separate the leaders from the pack, a sign of a maturing and rapidly professionalizing market.

She said recent litigation brought by the Australian Securities and Investments Commission (ASIC) was another clear sign that regulators were closely monitoring claims to ensure small investors were not misled.

A sustainable finance strategy, due to be published soon by Treasurer Jim Chalmers, has the potential to raise standards and unlock capital for the transition away from fossil fuels, she added.

Investors have growing influence over the future of businesses and are ensuring there is no slave labor in supply chains and greater support for tackling climate change, says report .

Some 77 organizations achieved high standards for responsible investing according to the RIAA Scorecard in 2023, up from 74 the previous year.

Fund managers use the weight of members’ accounts to ensure that companies’ claims are backed by real actions.

“If you want to make a net zero emissions commitment, this needs to be supported by a clear and achievable plan,” Ms Parker said.

So far, Australian investment managers have responded quickly, but they will need to continue to hone their ESG skills and adapt to direct their capital towards a more sustainable world.

ESG is no longer a “check box” for marketing purposes as investors expect quantifiable action on social and environmental issues, she said.