In Australia’s $2.4 Trillion Pension Pot, It Pays to Be Good

(Bloomberg) -- Responsible investing is paying dividends for Australia’s A$3.4 trillion ($2.4 trillion) pension pot. 

Funds seen as sustainable leaders controlled 42% of the assets in the nation’s default savings plans last year, up from 28% in 2019, according to the Responsible Investment Association of Australasia. The 13 leading funds, which integrate 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 Thursday.

Australians “are moving their money to reap not only the benefits for society and the environment, but their retirement savings as well,” RIAA’s Chief Executive Officer Simon O’Connor said. “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, RIAA said. 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 overwhelming expect their investment managers to implement their responsible investment commitments, with 71% demanding ESG reporting in their agreements, up from 39% in 2019
• Responsible investment approaches are influencing asset allocation decisions as portfolios are rebalanced at 55% of the funds, up from 39% in 2019

ESG integration has lead to behavioral 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 shakeup in as many years at AMP Ltd. 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 Ryan Korinke, Pacific Investment Management Co.’s global head of sustainability. PIMCO sponsored the study.

The RIAA has more than 450 members managing A$40 trillion in assets.

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