The rise of ESG in Australia and why there’s no slowing down

In October last year, the Responsible Investment Association Australasia (RIAA) released its Financial Adviser Guide to Responsible Investment report which highlighted increased client demand for ethical investment options.

“The rapid growth in responsible investment has been driven by client demand and strong investment outcomes, with clear evidence that responsible investments deliver stronger riskadjusted returns,” RIAA chief executive Simon O’Connor said at the time.

Soon after, global asset manager AXA IM warned that advisers would increasingly need to familiarise themselves with ethical investment options on the market to appeal to more clients.

“Funds that have been established to target specific social and environmental objectives, often called impact funds, are becoming far more ambitious in their investment goals. They are attracting sophisticated investors who expect very clear and detailed reporting, both quantitative and qualitative,” AXA IM head of ESG research and active ownership Yo Takatsuki said.

“As client demand grows, advisers need to familiarise themselves with responsible investment options to ensure they are offering clients products that are value-aligned, while also achieving strong financial returns.” The number of advisers using positive ESG screenings also grew this year from 43 per cent to 45.8 per cent.

VanEck’s sixth annual smart beta survey found that advisers are taking a more holistic approach as positive screenings help to identify companies “with high ESG credentials and consider the overall impact of that company, ensuring the fund appropriately aligns with investors’ values”, VanEck’s Asia-Pacific head of business development, Matt McKinnon, said. 

There’s no question that the growth of ESG in Australia has also been buoyed by the COVID-19 pandemic. A report conducted by market researcher Cerulli Associates in September found that the demand for sustainable investing has increased in the last 12 months, while responsible investment products have consistently outperformed.

“Investor interest in responsible investment and related themes has been accelerated by the events of the past year and shows no sign of slowing,” André Schnurrenberger, managing director, Europe, at Cerulli Associates, said.

During this period, 44 ASX-listed companies including Australian super fund HESTA, BHP Group and Rio Tinto have confirmed to be working to better address ESG related issues within their businesses including climate change, sustainable agriculture, modern slavery and the role of boards in overseeing the conduct of executives.

However, Tim Murphy, Morningstar’s director of manager research, suggested the spike in ESG popularity in Australia predates the COVID pandemic.

A report released earlier this year by the research house found that assets in Australian sustainable investments were $33.42 billion at the end of June 2021 — a 66 per cent increase when compared to the same period in 2020.

“The Australian bushfires back in 2019 certainly put ESG investing in the limelight as the effects of climate change become front and centre of the national dialogue,” Mr Murphy told ifa.

“The momentum in this growth continued with the onset of the global COVID-19 pandemic in 2020, a pattern that has continued into 2021.

“The substantial growth in ESG investing highlights that retail investors are increasingly demanding better alignment of their values with their investment strategies.”

When looking specifically at ESG investing, the numbers actually show that it has tripled in the last three years.

Independent investment consultancy bfinance reported in September that four in five wealth managers now integrate ESG considerations. The statistics showed a massive increase in wealth managers’ behaviour in regard to ESG, with 50 per cent of managers now integrating impact considerations (up from 18 per cent in 2018), while 33 per cent were actively considering how to integrate considerations.

Just a few weeks later, the BNP Paribas ESG Global Survey — with respondents including asset owners, official institutions and asset managers — revealed that 79 per cent of institutional investors are expected to make ESG investment central to their portfolio in the coming years.

It is no surprise then that assets in ESG ETFs, mutual funds, private funds and institutional mandates are expected to reach US$30 trillion by the end of the decade.

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.