Simon O'Connor says RIAA's latest study reveals that those super funds demonstrating responsible investment are taking a much bigger slice of the market and that manager selection is more robust.
The RIAA has just published its Responsible Investment Super Study 2021. What are the main findings?
For the first time, we're seeing responsible investment approaches sitting as central in core investment decision making, which is most clearly shown by the fact that responsible investment is influencing strategic asset allocation for the bulk of super funds in Australia (55 percent, up from 39 percent in 2019).
Significantly, this year's report shows that those super funds demonstrating leading practice responsible investment are taking a much bigger share of the market than they were two years ago. While one-quarter of super funds are demonstrating leading practice responsible investment, these super funds hold 42 percent of total assets, compared with 28 percent in 2019.
This is great news and affirms why responsible investing is no longer a 'nice to do' but an essential part of being a high-performing, member-centric fund.
The Responsible Investment Super Study 2021 presents the results of a survey of Australia's 50 largest super funds. We conduct this study biennially to track trends in the superannuation sector's engagement in responsible investing practices and also to help super funds better understand what constitutes leading practice responsible investment.
Does engaging in responsible investment translate into higher performance?
Time and again we see the evidence demonstrating that yes responsible investment is a key element of delivering better investment outcomes.
We are seeing again in this year's report that, in aggregate, super funds that implement leading practice responsible investment outperform their peers.
At the product level, the average performance of responsible investment leaders' My Super products is better than non-leaders over three, five, and seven-year timeframes.
Subsequently, it will come as little surprise that improved financial returns and managing investment risk are the biggest motivators for super funds to consider environmental, social, and governance factors in investment decision making.
How is this changing the landscape for asset managers and asset consultants?
The short answer is 'a lot'. We are seeing investment manager selection and monitoring practices becoming more robust, which is critical given that nearly three-quarters of super funds manage less than 10 percent of their assets internally.
In 2020, the majority of super funds (71 percent) that engaged external managers demanded ESG reporting in Investment Management Agreements (IMAs). This is way up from 39 percent two years back. The number of super funds tasking investment managers with executing voting policies in alignment with the funds' investment beliefs and strategy has also increased.
Fully, 92 percent now employ asset consultants with responsible investment expertise, up from 65 percent in 2019 and 55 percent in 2018, so the pressure is certainly on asset consultants to be constantly building their skills and capabilities in all things responsible investment if they are to remain competitive.
In short, those providing the essential investment services to super funds today will struggle to win business if they can't clearly demonstrate their responsible investment credentials.
Are there specific features of super funds that do responsible investing well?
Those super funds doing responsible investing well do have certain traits, including around resourcing and diversity.
For example, we've found that leading super funds typically employ anywhere between 3 to 9 ESG specialist staff members - a big step up in resourcing over very few years.
A dedicated team specialising in responsible investment or ESG and who are integrated into corporate decision-making structures is an important resource for super funds. Leaders understand this and engage dedicated staff strategically in the asset class and external manager reviews, and in the assessment of internally managed equities.
Meanwhile, non-leading super funds typically do not have a single staff member who spends most of their time on responsible investment or employ just one or two people in this role. Hopefully, this will change over time.
Also, for the first time this year, we looked at the correlation between super funds' board gender balance and the use of responsible investment approaches. Greater gender balance on super fund boards is a hallmark of leading responsible investment super funds: while leading super funds only make up a quarter of total funds, they have 44 percent of the total gender-balanced boards.
Also, the accountability for responsible investment at the highest level has become more widespread and specific. The overwhelming majority of super funds now allocate responsibility for responsible investment to boards or board committees, and 64 percent go so far as to tie board performance to the successful delivery of responsible investment strategies.
There are new legislative requirements for super funds to disclose portfolio holdings publicly in 2020. How are they going with this to date?
We know from RIAA's 2020 consumer research that transparency is important to consumers and allows them to make more informed decisions about their retirement savings, with 86 percent of Australians expecting their super fund to disclose which companies their money is invested in
Our Super Study shows that only 23 percent of super funds disclose their full holdings to the public. It's better compared to 2019 (12 percent) but still well short of where we need to be.
The majority (77 percent) of Australia's largest super funds still have work to do in terms of transparency if they are to meet new legislative requirements around disclosing their portfolio holdings.