Simon O’Connor, Responsible Investment Association Australasia (RIAA) chief – and now chair of the Global Sustainable Investment Alliance – explains why responsible investing must move from rhetoric to reality…
Responsible investment has rapidly risen up the agenda of New Zealand investment and finance markets over the past year. Yet this shift is far from merely a NZ phenomenon – the rise in responsible investment has become a major force shaping global capital markets in recent years, and, in turn is influencing companies and others seeking to raise capital in those global markets like never before.
Globally, a new report released this week by the Global Sustainable Investment Alliance (GSIA), the fifth in a series of biennial reports mapping the state of sustainable investment in the major financial markets, shows responsible investments have reached US$35.3 trillion in assets under management, now equating to 36% of all professionally managed assets.
Responsible investment assets are continuing to grow in most regions, with ESG integration being the most common sustainable investment strategy followed by negative screening, corporate engagement and shareholder action, norms-based screening and sustainability-themed investment.
Investors are moving en masse to put in place net zero emissions targets for 2050 as evidenced by the rapid up take of the Net Zero Asset Owners and Asset Managers Alliances, and we’re seeing a record numbers of investors are supporting social and environmental shareholder resolutions on issues as diverse as dismantling racism to overhauling boardroom composition to ensure expertise on climate change.
Yet hidden behind these top-line results is an industry in transition, with rapid developments taking place across regions and markets that are resetting expectations of sustainable investment, including an emphasis on moving the industry towards best standards of practice that contribute measurably to a more sustainable world.
These are trends that those in finance in NZ would see as very familiar. Different markets face different drivers, but in here, the policy is having a stronger influence every day.
In combination, the requirement that responsible investment is committed to by default KiwiSaver providers, the guidance to prevent greenwashing by the Financial Markets Authority, the legislation mandating climate related financial disclosures are all examples of a policy environment that is very rapidly setting a coherent strategy to hardwire sustainability into financial services.
Together with a Zero Carbon Act and now a Climate Commission report, there are clear targets in place that will further set in train the direction of capital flows in NZ over coming years.
The industry has taken note and is proactively pushing this agenda further. The Sustainable Finance Forum’s Roadmap, and soon to be launched Centre for Sustainable Finance, will be a critical piece of the plan that will give NZ the best chance of ensuring capital is aligned with the long term objectives of the country.
However, we’re not there yet. The reality remains that despite seeing such significant sums of capital committed to responsible investment, here and internationally, we are still operating in a world that is far from sustainable. As a world, we remain far from being on target to achieve Paris Agreement commitments, or delivering upon the UN’s Sustainable Development Goals – both of which are calling out the important role of finance.
In the future, the success of responsible investment will be judged on whether the investments made today can help deliver the 1.5-degree world of tomorrow.
Globally, this shift towards responsible investment is accelerating, with tightening regulatory frameworks and industry standards, rising consumer expectations and investors stepping up to ensure their investments are delivering for a sustainable future in ever greater numbers.
The European Union Sustainable Finance Action Plan, for example, has set new definitions for responsible investment embedded in legislation. This has reshaped the way responsible investment is fundamentally defined in Europe. In short, having merely a commitment to sustainable or responsible investment today is simply inadequate. It’s becoming increasingly expected that these commitments can be substantiated, transparently, with the evidence that shows how sustainability risks are incorporated into investments as well as detailing any adverse impacts.
The global network of sustainable investment organisations that make up the GSIA all work in their individual markets to progress this transition, including driven by the Responsible Investment Association Australasia here, ensuring responsible investment is delivered in a manner aligned with best practice standards, driving positive change in corporate policies and performance and ultimately, aligning with a more sustainable future.
Responsible investors need to be ready for this next chapter, to be able to articulate the impact of what responsible investment is achieving, to play a role in contributing to these global commitments, but also to better meet the growing expectations of members of the public who expect this of us.
It is now time to move decisively into this new chapter of our story to ensure we are harnessing this significant pool of capital and directing it towards achieving the impacts that are both desirable and essential for long-term investment outcomes and a healthy and sustainable planet.