New rules curb impact investing for smaller Australian funds
New regulation in Australia is curbing the appeal of impact investing – where investments are managed to produce specific positive ESG outcomes – as investors in Asia Pacific trail those in Europe and the US in allocations to the sector.
Australia’s new Your Future Your Super (YFYS) regulations, which came into force in July 2021 in Australia, include annual performance assessments conducted by regulator APRA, with the results published on the government website.
“Prior to the new regulation we definitely had an interest in looking into impact funds, however for the time being we are looking at other areas to ensure we are doing the best we can to contribute to a sustainable future in other asset classes,” Fiona Mann, head of listed equities and ESG at Brighter Super told AsianInvestor.
She explained that the different return profile of impact portfolios made them more difficult to include in portfolios for smaller funds, adding that a combination of the merger between LGIAsuper and Energy Super, which completed in July 2021, and these tougher rules, made the adoption of impact portfolio less likely at the moment.
“YFYS means you have to be much more considered. Funds must carefully consider any off-benchmark investments because it brings a lot of risk. Investing in impact can create a lot of peer risk,” she said.
Where a fund’s performance falls more than half a per cent below the average in their peer group, the new rules prevent them from taking on additional contributions from members.
“Many of these investments follow a J-curve in terms of returns: they typically have a longer return trajectory, meaning you may not see returns for the first few years,” she said.
Mann said that a single large allocation to an impact fund could risk creating a level of underperformance across the fund as a whole. “One fund could significantly impact on performance,” she said.
The new rules also increase scrutiny on fees which tend to be higher for impact funds, further reducing their appeal.
FORESTRY SNUB
In September, Mann told Asian Investor that the fund had not yet made any allocations to forestry, which has become increasingly associated with environmental benefits as large scale planting and carbon credit programmes seek to reduce atmospheric CO2 levels.
The fund is not alone in eschewing the forestry sector. First Super does not currently own significant forestry or agriculture assets, despite being formed in 2008 from the merger of three schemes including those representing the timber industry workers and pulp and paper workers.
In Asia, meanwhile, low allocations to forestry and related impact sectors are not limited to super funds.
“ESG and reforestation does not appear to be such a strong driver of investment decision making [in Asia]. My share register does not have any Asian capital on it,” Jason Baggaley, deputy head of real estate value add funds, at abrdn in London, told AsianInvestor. He noted that uptake of environmentally-linked investing in the sector by Asian investors still trailed engagement by their peers in Europe and the US.
Baggaley manages Standard Life Investments Property Income Trust (SLIPIT), which in September 2021 acquired 1,400 hectares of non-productive open moorland in Scotland’s Cairngorm National Park. The fund will devote the land to carbon capture via tree planting and peatland restoration, a process whereby drying peatland is restored to ensure it no longer releases carbon.
DATA GAP
But Tomomi Shimada, APAC lead sustainable investing strategist at JP Morgan Asset Management, told AsianInvestor that a data gap in impact investing may be frustrating Asian investors efforts to allocate to the sector.
She pointed to natural capital investments, such as biodiversity initiatives. “Although the question of biodiversity loss is recognised in the [environmental] dialogue, investors are not able to measure its impact on an investment,” she said.
She said JP Morgan Asset Management was working to develop natural language processing tools – algorithms which trawl online and in print content for references to key words – that indicate exposure to natural capital risks.
"Even if [natural capital] is not recognised as a revenue area, [companies or assets] may have exposure. If we identified this, we would raise this with them,” she said. In many cases the algorithmic tools employed by JP Morgan were developed to analyse social risks but are equally valuable in measuring risks around natural capital, she added.