Investment dollars are flowing to companies that avoid harm to people and the planet but there is room for improvement, according to a report by ethical experts.
Economic uncertainty, market volatility and sharper regulation here and overseas have hit responsible investing in Australia, the Responsible Investment Benchmark Report found.
The research released by Responsible Investment Association Australasia (RIAA) on Monday found environment, social and governance (ESG) considerations are becoming deeply embedded across investment markets.
"Natural capital" is emerging as an increasingly popular theme, with almost half (46 per cent) of survey respondents screening possible investments for biodiversity preservation and conservation, while climate change continues to be a priority.
But a sharper focus by regulators on sustainability declarations by companies has put domestic and international fund managers on notice.
EY Australia partner Emma Herd said responsible investment has moved into a new phase as the bar keeps rising on expectations for transparency and performance.
"Heightened scrutiny is generating new caution for funds making sustainability claims," she said.
"But the need to drive more capital into sustainable outcomes is critical if we are to adequately respond to the biggest social and environmental challenges of our time."
Some 93 per cent of Australia's professionally managed funds, worth $3.3 trillion, are managed by investors with public commitments to so-called responsible investment.
But the size of the responsible investment market was $1.3 trillion at the end of 2022, down 16 per cent from a year earlier.
Questions about financial performance remain the top barrier to responsible investment growth, according to the research.
Concerns over greenwashing, or exaggerated claims, increased dramatically to be the second-highest concern as regulators crack down on false sustainability credentials.
In July, the Australian Prudential Regulation Authority released guidance for superannuation trustees after a two years of consultation and reforms to strengthen investment governance practices across the industry.
RIAA spokeswoman Estelle Parker said recent policy efforts and higher industry standards have started to separate the leaders from the pack, as a sign of a rapidly maturing and professionalising market.
She said recent litigation by Australian Securities and Investments Commission (ASIC) was another clear sign that regulators were watching claims closely to ensure small investors were not hoodwinked.
A sustainable finance strategy, due for release soon by Treasurer Jim Chalmers, has the potential to lift standards and unlock capital for the transition off fossil fuels, she added.
Investors are having an increasing influence on shaping the future of companies, and ensuring there is no slave labour in supply chains and greater support for curbing climate change, the report found.
Some 77 organisations attained the high standards of responsible investment against RIAA's scorecard in 2023, up from 74 the year before.
Fund managers are using the weight of members' accounts to make sure companies' claims are supported by genuine action.
"If you're going to make a net zero commitment, this needs to be backed up by a clear and achievable plan," Ms Parker said.
So far, Australian investment managers have been quick to respond but they will need to continue to hone their ESG skills and adapt to direct capital towards a more sustainable world.
ESG is no longer a "tick box" for marketing purposes, as investors expect quantifiable action on social and environmental issues, she said.
