The eminent professor John Kay visited these shores from the UK in early 2016 to expound upon the information in his latest book, Other People’s Money. His message was timely and eloquent, emphasizing that no matter where we sit in this industry, we are all employed to manage other people’s money – the savings of the Australian public.
Historically, Australians have shown little interest in how their savings are managed under our compulsory superannuation system, with infamously low levels of member engagement.
However, recent moves in the market are worth paying close attention to, as they indicate the days of the disengaged consumer are numbered.
Responsible Investment Association Australasia (RIAA) has been monitoring and reporting on the size of the responsible investment industry for 15 years, and recently released its Responsible Investment Benchmark Report; measuring the size, growth and performance of this segment of the finance industry.
Uptake of responsible investment strategies
The report maps out clearly that there has been an ongoing increase in the uptake of responsible investment strategies, to a point today where half of all professionally managed assets in Australia are being managed in this way. This totals a substantial $633 billion of assets under management (AUM).
With nine of the largest 10 fund managers, and 35 of our largest asset owners having self-declared a commitment to responsible investing, this approach has become the minimum standard of good investment practice in Australia.
This quiet shift has gained momentum as the long term benefits from considering environmental, social and governance factors (ESG) become more evident. Recent examples of listed companies destroying shareholder value through mismanagement of ESG factors have only further highlighted that these are critical risk issues for investors to manage, tied closely to some of the most significant megatrends for long term investors.
But the surprise in this year’s report is that we are now seeing a significant step up in consumer demand for responsible and ethical investment options.
Consumers ‘ever more vocal’
Few in this industry would have missed the shift underway across finance, whereby consumers are ever more vocally demanding their savings be managed in a way that matches their values and beliefs.
Fossil fuel divestment campaigns, a shift to avoid tobacco investments, an increasingly stronger focus on human rights, as well as a deeper focus on how investors respond to climate change risks are all themes that have recently been on the radar for consumers, and subsequently for investors.
This rising consumer engagement has been confirmed with significant flows of funds into ‘core’ responsible investment strategies that utilise screening, impact investments and sustainability themed approaches.
Indeed, funds flowing into these strategies have doubled in the past two years, with an annual increase of 60 per cent, to reach $51 billion in AUM at the end of 2015.
As our best measure of the consumer demand for responsible and ethical products, we are now seeing significant absolute growth in funds flows as well as growth in relative terms, compared to the market. As demand takes off, funds have now reached 3.8 per cent of the total professionally managed assets in Australia, after sitting around 1.5 per cent for a decade.
Start of ‘unstoppable trend’
Although this remains a small portion of professionally managed funds, there are many reasons to see this as the start of an unstoppable trend, consistent with the rise of conscientious consumption, which is shaping and disrupting so many other industries.
Social media, the rise of millennials, NGO activism, even portfolio holdings disclosure, will all enable an ever more engaged client base that will be expecting much more from how their savings are managed.
Our research indicates the industry is already responding, with superannuation funds putting in place negative screens, impact investment strategies, new mandates across green property, clean energy, low carbon and sustainable agriculture.
It’s now absolutely clear that this is far from a passing trend, but an evolution of the entire sector, that is now being driven strongly by consumer demand as well as clear investment opportunity.
Whether we like it or not, the finance sector is being reminded that we are all managing other people’s money and Australians are after both strong returns and a better social and environmental outlook.
Simon O’Connor is the chief executive of Responsible Investment Association Australasia