Australian superannuation funds and investors are focusing on ESG investment matters more than ever before, according to new global research from asset consultant bfinance. DANIELE GOLDBERG explores the key changes in implementation practices and identifies today’s key challenges.
In the midst of the COVID-19 pandemic, bfinance conducted an Asset Owner Survey to ascertain how investors’ priorities and practices are changing when it comes to ESG investing, sustainability and impact.
The survey responses were received from 256 global investors, the majority being pension funds, with combined assets of approximately US$7 trillion. This included responses from 28 Australian investors, over half of whom were superannuation funds, as well as some insurance companies and endowment trusts.
The results found the global health pandemic has accelerated the focus on environmental, governance and social (ESG) issues with 96 per cent of Australian investors now placing a high or moderate importance of ESG into their investment strategy.
In fact, over 45 per cent of Australian investors in bfinance’s study said the pandemic had affected their investment team’s focus on ESG issues. ESG criteria now also plays a crucial role in selecting external asset managers in Australia.
When assessing global data, Australian investors’ approaches to ESG was consistent with global peers. For example, the survey revealed that 50 per cent of Australian investors are now assessing carbon emissions in their portfolio, compared to 46 per cent of global investors in the survey.
Investors are also now starting to actively move on industry imperatives such as the UN Sustainable Development Goals (SDG) which was launched five years ago. While take up of these goals was slow across the globe, Australian investors now only trail by 3 per cent compared to the overall survey results. In the last three years, 25 per cent of Australian respondents have started or are in the midst of mapping their portfolio against the UN SDGs compared to 28 per cent of global investors.
Importantly, the bfinance survey revealed a shift in the way investors are now engaging with ESG. Rather than seeing environment and governance issues as an opportunity, investors are adopting an active engagement approach with ESG now defined by outcomes. A rise in the UN SDG reporting is an example of this increased focus on impact. Investors are also now assessing the carbon emission footprint of their portfolio, proving that investors are now wanting to both manage and reduce their carbon impacts. The focus is no longer integration but impact.
From an asset class perspective, the majority of Australian investors have integrated ESG across all asset classes for over the last three years. Fixed income, however, falls short at 48 per cent.
Hedge funds ranked the worst in terms of ESG integration for Australian investors. When asked if they would be unlikely to hire an external manager who did not meet certain ESG requirements, 60 per cent of investors reported none of the listed issues would affect their decision.
Real assets such as infrastructure and real estate have the highest ESG integration, which is not surprising given that these assets include ESG elements such as renewable energy. Australian investors also tend to have a higher weighting to real estate assets than their global peers. Ultimately, the majority of respondents agree ESG integration will be associated with outperformance over the next three years across all asset classes except for hedge funds.
Reporting on ESG issues remains a key challenge, with 35 per cent of Australian investors struggling to get consistent ESG reporting from asset managers across all asset classes. Globally, this challenge is more pronounced with 55 per cent of investors identifying it as a major problem.
The current regulatory framework could make reporting and therefore active engagement on ESG more challenging for investors. Currently there is a fragmented approach. Europe is leading the way with its Taxonomy framework that includes climate targets. The US is following, with the newly installed Biden Administration recognising climate risk is indeed a reality and has already re-signed up to the Paris Agreement.
Closer to home, Australian Prime Minister Scott Morrison has recently changed his rhetoric towards climate change. While the states and territories had already moved on net zero emission targets for 2050, it was only February this year the PM succumbed to pledging he is hoping to achieve net zero carbon emissions by 2050. While not committing to achieving the goal by 2050, but rather “as soon as possible”, it provides critics with optimism that the Government is finally taking meaningful steps to address climate change. This undoubtedly will help align the interests of Government and the Private sector in promoting policy engagement in ESG, at least from an environmental perspective.
With ESG now a priority for both Australian and global investors, the time is now to act sustainably.