Under pressure from super funds fearful of regulatory sanctions for greenwashing, Australia’s responsible investment market is shrinking.
The 22nd annual Responsible Investment Benchmark Report, published on September 17, found the proportion of total managed funds that are dedicated to responsible investment shrunk by 16% last year, to A$1.3 trillion (US$830 billion) out of total managed funds of A$3.3 trillion (US$2.2 trillion).
The report, produced by the Responsible Investment Association Australasia (RIAA), the leading membership body for the industry, attributed the fall in part to tighter definitions around ESG funds and strategies.
This follows high profile crackdowns on greenwashing by the market regulator, the Australian Securities and Investments Commission (ASIC).
“Evolving standards and increased regulatory scrutiny have led to tightening definitions of responsible investment by some large international investment managers,” the report noted.
ASIC’s decision in August to sue Active Super, the A$14 billion (US$8.6 billion) Australian super fund, for allegedly misleading stakeholders regarding its ethical and responsible investment claims, was the latest in a series of actions against asset owners and asset managers.
“We have seen that super funds are being more vigilant, reviewing what they are publicly disclosing to ensure that their claims are being appropriately backed up with action, removing any ambiguous statements,” said Suzy Yoon, senior consultant and acting head of sustainability at Jana Investment Advisors, in Sydney.
She noted that the most recent greenwashing cases have focused on investment screening criteria – defined by ASIC as “descriptions of screened investments that overstate, mislead or are applied inconsistently” – where there is a discrepancy in implementation of what is disclosed to members.
The RIAA spokesperson said it was impossible to say what, if any, contribution had come as a result of the tighter definitions for the 10 super funds covered by the survey, whose internally managed funds are included in the review.
“It’s impossible to tell specifically how much responsible investment AUM reduced, as a result of tightening definitions or other factors because we didn’t ask that series of questions,” they added.
But Brett Morgan, Australian campaigns coordinator for Market Forces, an affiliate of Friends of the Earth Australia, which lobbies the financial sector for better environmental outcomes, said that super funds’ tightening up or walking back disclosures in the face of closer regulatory scrutiny fell short of their responsibilities.
“Instead of tinkering around the edges of definitions, investors should be using their leverage to prevent the companies they invest in from expanding fossil fuels and publicly divesting if companies fail to respond,” he said.
“Asset owners with climate commitments must be demanding and delivering an end to the fossil fuel expansion plans of the companies they invest in and divesting from any company failing to comply. Anything short of this is greenwashing,” he added.
The RIAA report revealed that funds using negative screening fell for the first time, by 6%, to $664 billion. Some $410 billion of funds used exclusions based on fossil fuels, and assets representing $150 billion screened for fossil fuel power generation. The rest screened for exposure to mining, production or exploration of fossil fuels. About $569 billion in AUM screened for tobacco and $353 billion for nuclear weapons.
To meet the industry’s evolving standards and closer scrutiny by the regulator, asset owners would have to further improve their monitoring and substantiation of sustainable claims, according to Geri McMahon, climate change and sustainability partner at KPMG Australia.
“To ensure the claims they making are accurate, asset owners will have to develop robust frameworks and policies around greenwashing, risk and control reviews,” he said.
"[Greenwashing] is an issue that regulators across all major markets are tackling with firms offering ESG-labelled investment products," Kathryn Saklatvala, senior director and head of investment content at consultancy Bfinance in London. Roughly a quarter of her clients are institutional investors in Asia, she told Asian Investor earlier this month.
The report also attributed the fall, much of which it noted had been made up in the early months of 2023, to slower global economic growth and the inability of the responsible investment market to capitalise on market gains in the mining sector, one that is often avoided by investors focused on low carbon investing.
The spokesperson pointed to the declining value of assets across the entire Australian total managed funds industry, which finished the year $40 billion lower than in 2021.
The RIAA has more than 500 members representing $29 trillion in assets under management across Australia and New Zealand.