Investors are becoming more ethically conscious

Investors worldwide are becoming more actively engaged with where their money is being invested, with flows into ESG products continuing to build momentum.

When it comes to where people are investing their money globally, the evidence is irrefutable.

Investors worldwide are becoming more actively engaged with where their money is being invested.

And that higher level of engagement is continuing to see significant and consistent inflows into investment assets that are considered to be meeting environmental, social and governance (ESG) standards.

Put another way, more and more investors are avoiding investments that are doing the opposite.

As such, they're committed to excluding investments (primarily companies) that are involved in a range of areas.

These include companies involved in non-renewable energy (fossil fuels and nuclear power); vice products (adult entertainment, alcohol, gambling and tobacco); weapons (conventional and unconventional military weapons and firearms); and companies breaching human and labour rights, environmental, and anti-corruption standards.

According to the Global Sustainable Investment Alliance, ESG-related assets now account for one-in-three dollars managed globally and are poised to reach US$41 trillion (A$56 trillion) by the end of this year.

This reflects record-breaking inflows into ESG products such as managed funds and exchange traded funds (ETFs) amid rising concerns around the impacts of climate change and other issues widely affecting societies.

The Global Sustainable Investment Alliance predicts ESG assets will exceed US$60 trillion by 2026.

Demand on the rise

ESG investing, also known as responsible investing, is continuing to build momentum in the Australian market.

Around $3 billion of investments flowed into ESG funds in Australia last year, with around $2.5 billion of inflows recorded in the second half of the year.

The ESG inflows were broadly split between index funds and active funds, and between equities and fixed income products.

A recent survey by the Responsible Investing Association of Australasia found 43 per cent of Australians are either already investing responsibly, or planning to invest responsibly in the next 12 months.

Three in five Australians said they would be motivated to try to save and invest more if they knew it would make a positive difference in the world.

The survey also found that 64 per cent of consumers expect financial advisers to be knowledgeable about responsible investment options.

Risk and return

It's a commonly held misconception that there is a trade-off between ESG considerations (investing responsibly) and investment returns.

But the weight of market evidence shows that's not the case.

To the contrary, ESG-focused products have largely moved in line with broader markets over the longer term, although it's also evident they can outperform or underperform over shorter time periods.

For example, the recent global surges in energy prices, particularly in fossil fuels, have seen most ESG products underperform the broader market because they typically exclude listed oil producers and supporting businesses.

This performance trend is likely to reverse as energy supply lines gradually begin to normalise.

Overall, ESG index fund products are designed to behave like the broader market and still provide a diversified, low-cost exposure to a large number of companies while avoiding certain ESK risks.

As such, ESG investment strategies can easily be incorporated into diversified portfolios without comprising risk and return characteristics over the long term.

At Vanguard, we think about ESG risks and opportunities in the context of delivering long-term value to investors and helping them to meet their investment objectives.



Tony Kaye
26 Apr, 2022

  • Tax tips

    The more detail you can give your accountant the quicker your tax return can be processed and, usually, the better the outcome. The following will help.

  • Super, Death, and taxes

    An interesting finding in the federal government's Retirement Income Review report is that many Australians are dying with the majority of the wealth they had when they retired.

  • ATO responds to GST case involving SMSF

    The ATO has issued a decision impact statement on a recent decision that determined whether an SMSF was liable for GST on the sale of subdivided lots.

  • ATO statistics show 12 per cent jump in SMSF assets

    The total value of SMSF assets has climbed to $892 billion during the 12 months to March, according to the latest ATO statistics.

Create Financial Planning ABN 92 115 963 445, trading as IT Financial Services, is an Authorised Representative of Consultum Financial Advisers Pty Ltd, ABN 65 006 373 995, an Australian Financial Services Licensee with its registered office at Level 6, 161 Collins Street, Melbourne VIC 3000.