Australia's $3.3 trillion pension pot reaps dividends with ESG

(BLOOMBERG) Responsible investing is paying dividends for Australia’s A$3.4 trillion (S$3.3 trillion) pension pot.

Funds seen as sustainable leaders controlled 42 per cent of the assets in the nation’s default savings plans last year, up from 28 per cent in 2019, according to the Responsible Investment Association of Australasia (RIAA).

The 13 leading funds – which integrate environmental, social and governance (ESG) practices, are transparent and demonstrate a commitment to good governance and accountability – also outperformed rivals over three, five and seven years, the group said in a report on Thursday.

Australians “are moving their money to reap not only the benefits for society and the environment, but their retirement savings as well,” said RIAA chief executive Simon O’Connor.

“Super funds that are doing responsible investment well are seeing their funds grow, leaving laggards at risk of losing market share.”

The shift comes as Australian workers become more concerned about how their retirement savings are invested, pressuring funds to adopt ESG practices and scrap investments in fossil fuel companies after deadly wildfires last year razed an area the size of England.

Funds are also acting after Retail Employees Superannuation Trust settled a lawsuit brought by a fund member over its approach to climate risk mitigation by committing to net zero emissions in its portfolio by 2050.

Australia’s pension industry has been shaking off its reputation as a sector that consists mainly of passive investors, hiring ESG specialists and integrating these factors into their portfolios as climate change and corporate malpractice seize public attention.

At the leading funds, the ESG teams – which typically have more than three members – provide input into key investment decisions and asset class reviews, leading to out-performance of more than 50 basis points over peers, said RIAA, which has more than 450 members managing A$40 trillion in assets.

Here are other key findings:

• Two-thirds of funds implement environmental, social and governance practices to either improve financial returns or help manage investment risk.

• Asset owners overwhelmingly expect their investment managers to implement their responsible investment commitments, with 71 per cent demanding ESG reporting in their agreements, up from 39 per cent in 2019.

• Responsible investment approaches are influencing asset allocation decisions as portfolios are rebalanced at 55 per cent of the funds, up from 39 per cent in 2019.

ESG integration has led to behavioural shifts across corporate Australia, from mining companies pledging to take more action on climate change to firms appointing more female directors and senior executives.

The shift also forced the resignation of senior executives at Rio Tinto Group after the miner blew up a 40,000-year-old Aboriginal heritage site and caused the second boardroom shake-up in as many years at AMP after a sexual harassment scandal.

“Asset owners in Australia and New Zealand are bellwethers for sustainable investing in the Asia region and globally, which makes the results of this study showing their increasing commitment to responsible investment practices particularly encouraging,” said Pacific Investment Management Co (Pimco) global head of sustainability Ryan Korinke. Pimco sponsored the study.

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