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Meteoric rise of climate aware investing backed by grey suited regulators

by Lewis Panther | 10 Jul 2019

Ethical investing is proving green really is good for business, according to new figures.

Professionally managed funds that are classed as responsible have seen a meteoric rise in just five years as millennials demand to know where their Super is being invested.

The Responsible Investment Association Australasia (RIAA) has revealed almost half the $2.24trillion managed by professional investors is in a climate aware portfolio.

That compares to just 17 per cent of the total in 2013, when responsible investments accounted for $178 billion.

RIAA chief executive Simon O’Connor said the sector’s growth was down to the fact it was consistently beating the benchmark. 

Responsible funds returned on average 6.43% over five years and 12.39% over 10 years. Comparable S&P/ASX figures showed returns of 5.6% and 8.91% respectively.

But he also praised the regulators for putting climate at the heart of policy, while calling on the federal government to join forward-thinking investors in going green.

He said: “There’s a rapid move globally from policy makers and regulators in building sustainability and climate change considerations into the finance sector. 

“We've seen a green finance strategy released by the UK government where it wants to be carbon neutral by 2050.

“There is an acknowledgement that the finance sector has a very key role to play in terms of funding the transition to a lower carbon future in line with the Paris Agreement goals of keeping temperatures below two degrees of warming. 

“What has emerged in the last couple of years is a much clearer evidence base that highlights how climate change risks have reached a point where they become economic risks and financial stability risks.

“That has been echoed throughout the financial regulators globally over the last year. 

“As a result, APRA and ASIC are picking up on that and over the last two years have moved to a point where they are starting to build in climate change supervision as part of their mandate.

“I guess in a sense it's a sudden shift because they have moved from monitoring to actually supervising as a compliance issue that financial entities must be managing climate change risks.

“It feels like a very strong step up by the regulators. But it comes off the back of a lot of work and understanding of the emerging risks around climate change that have come out of global developments over the last five years.”

Just a week ago, APRA’s Geoff Summerhayes notably said: “When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard or hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking.”

Picking up on the light-hearted manner of the speech, O’Connor said it could not hide the calculated thinking of the regulators.

“They're not saying it because they've become passionate advocates for a low carbon future,” he said. 

“They're saying it because they have established that there is an economic impact of mismanagement of issues related to this. It's carefully worded when they talk about this.”

Even without the backing of central government, he is confident the sector will continue to flourish because of the long-term nature of the powerful Super funds.

He added: “Most of the investors in some way, shape or form in Australia are connected through the superannuation fund industry, which is long-term investing. 

“There's a very concerted view from the super fund community that climate change is a long-term issue, it is one that they need to look through the short-term political noise and invest in line with the trajectory of the Paris Agreement, because this is, without a doubt, where the world is shifting.

“What's really interesting is that we are seeing capital moving towards low carbon assets, towards renewable energy, energy efficiency, greener property, on a really large scale. 

“What stronger policy signals would do is it would hasten that move and it would grow the amount of capital flowing in that direction. So we would like to see stronger signals from the government. 

“We'd like to see signals and policy signals and settings that are consistent with the Paris Agreement. 

“Nevertheless, investors are moving in spite of the lack of those strong signals right now.

“Most of the Super Fund members of ours that we talk to will say that the most frequent questions they get in their call centre are about ESG issues, ethical issues.”

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