Investors have high expectations of ESG - Cerulli Associates

The Australian bushfire crisis has accelerated the push towards a broader acceptance of environmental, social and governance (ESG) investing, according to the latest quarterly report on Asia Pacific from global research house Cerulli Associates.

"This has spilled over to institutional investors, mostly superannuation funds, and their investments, and is forcing them to take the risks of climate change more seriously," the report said.

Need to do more

The report recognises the steps already made by institutional investors, mainly super funds, but says as the changing climate aggravates the risk of big weather events, like bushfires, there is a growing expectation of funds to do more.

Citing a consumer survey by the Responsible Investment Association Australasia (RIAA) after the 2020 bushfire crisis, Cerulli said that 86 per cent of Australians now expect their super and other assets to be invested responsibly and ethically.

"Industry funds HESTA and UniSuper saw demonstrations by members and environmental groups in early 2020 demanding them to drop investments in companies that help fuel climate change," Cerulli said.

And then there is the case by Mark McVeigh against Retail Employees Superannuation Trust (REST), for its alleged failure to properly consider climate risk in investing. That case will be heard in the Federal Court from 2 to 4 November 2020 and will be watched closely by super funds to see whether the Court finds that the super fund had a legal obligation to consider climate change risks when investing.

Follow the money

Citing data from Rainmaker Information (publisher of this newsletter), Cerulli says that funds under management in Australian ESG exchange traded products (ETPs) rose from $325 million in June 2017 to $1.8 billion as of end-June 2020. And that was despite a reduction in the number of ESG ETPs from 15 to nine.

And total assets under management in responsible investing have surpassed the $1 trillion mark, according to the RIAA's latest benchmark report. It now accounts for 37 per cent of Australia's $3.14 trillion in total professionally managed assets.

Regulator scrutiny

Even the regulator is getting in on the act. The Australian Prudential Regulation Authority (APRA) notified its regulated entities in February of this year that it would step up its scrutiny of how they are managing the financial risks of climate change.

"It identified a need to address a lack of climate data, quantify the likely impact of the physical, transitional, and liability risks of climate change, and assess and properly price these risks," Cerulli said.