ESG investing is flourishing through COVID-19, beating funds with less focus on social responsibility.
That’s the conclusion of the Responsible Investment Association Australasia whose CEO Simon O’Connor spoke to InFinance about the impact of the pandemic.
Some large Super funds have even hardened their commitment to achieving zero emissions and a sustainability-focused portfolio, Mr O’Connor said.
“We wondered how the focus on ESG, climate change or social responsibility was going to remain through the immediacy of crisis management, managing the pandemic,” he said.
“And we're really pleased we haven't really seen anyone stepping back from their commitments or strength of conviction around climate change, managing climate change risk.
“APRA has clearly stated it is continuing to progress with work on climate change risk, and how it regulate that and its expectations around that.
“COVID-19 has highlighted the kind of vulnerabilities in our economy - and there are quite a number of parallels with climate change in terms of how that plays out on a system wide economic impact.
“A lot of the areas we've been focused on around managing climate change risk as an investor have looked at resilience, doing sensitivity testing, running scenario tests, planning, preparation, running all the mitigants.
“These are similar to what companies have had to go through in the last couple of months, running resilience and sensitivity tests, scenario tests.”
The economy wide impact of COVID has brought about an understanding of what could happen as result of climate change, according to Mr O’Connor.
“We saw what happened as a result of the bush fires just back in January. Although more regionally focused, they’ve had economy wide impacts. Severe weather events can do that as well,” he said.
Whether those events led to organisations strengthening their commitments is not certain. But big names in the superannuation sector have nailed their colours to the mast.
“We've seen that conviction towards ESG stepping up into harder commitments,” he added.
“In the last couple of weeks we've seen First State Super coming out with a really strong net zero mission commitment by 2050, and then even more so though putting in place time bound targets on the way to 2050.
“We saw HESTA come out similarly. We know that a whole lot of banks have made similar commitments.”
But how and why is responsible investing beating the benchmark?
An understanding the ESG risk and an additional layer of information helps investors make better informed decisions so ultimately they should be weathering big down turns better, says Mr O’Connor.
“There's some really strong evidence that's come out - looking at the first quarter and almost the first half of this year now - that responsible investment funds have held up really well and better than their mainstream counterparts through this period,” he says.
“Companies with higher ESG ratings have outperformed companies with poor ESG rating.
“Those companies that actually manage social issues, environmental issues, labour force issues well have been proven themselves to be more resilient in this period.”
Research by AXA Investment Managers, MSCI, Fidelity International Investment, Schroders, BlackRock and Morningstar has delivered similar findings, he says.
The RIAA, which has more than 300 members managing $9trillion in assets, is also seeing a greater interest in its accreditation process.
“A lot of people are trying to put products into the marketplace with good environmental or ethical or responsible credentials,” said Mr O’Connor.
“And our certification program has gotten busier and busier over the last 12 months.
“With that growing market comes a desire to have those products verified by a third party to say that they're true to label, they're delivering what they're saying their delivering.
“So our product certification that has gone gangbusters in the last year to 18 months.
“It’s gone from something in the order of a 120 products 12 months ago to about 175 products certified today. Another 50 or so products are in the application stage.”
With consumers becoming much more sustainability savvy, the standards bar has in the marketplace has been lifted too, he explained.
“Three years ago, an ethical product that just excluded tobacco and controversial weapons was fine and adequate, but today it's much more sophisticated.
How do you manage climate change risk, he asks. “It’s not about just excluding a couple of stocks about, it’s about how you engage.”
Here too the RIAA is seeing an increasing RI.
“We have a front end online tool which is where we send advisors and consumers to called responsiblereturns.com.au - and we're seeing thousands of monthly visitors through that site and a lot of advisors are moving to put products on their approved product list.”
