Advice improves investors’ ESG understanding

According to the 2023 Responsible Investing Report, created by Investment Trends in partnership with ethical investment manager Australian Ethical, responsible investors who work with a financial adviser are “significantly better informed” about investment performance, fees, and the sustainable impact of products than those who try to look for responsible or ESG options themselves.

The report also contended that demand for advice about responsible investing should grow with the “next wave” of investors, with 29 per cent saying they don’t understand responsible investment methodology, and around 27 per cent wanting to seek financial advice before investing.

Looking to improve the ability of investors and advisers to understand the broader ESG space, both cohorts expressed a need for standardised terminology, better measurement and clearer comparisons to combat greenwashing. Almost half (47 per cent) of advisers surveyed said greenwashing was increasingly challenging their ability to recommend responsible investments.

Despite this, the report said that demand for ESG investments remained steady, with 82 per cent of responsible investment advisers recommending responsible investment products to clients in the last 12 months.

The report found that advisers surveyed favour “actively managed funds” that met ESG principles, and the most common method that advisers use to assess the ESG credentials of an investment product is through ratings house Morningstar, followed by Lonsec.

Australian Ethical head of client relationships Leah Willis, said: “As the responsible investment industry matures, it’s clear investors will need to rely on the ability and guidance of a professional adviser to help them navigate investing in line with their values.

“It’s promising to see the effect responsible investment-focused advisers have already had on the cohort of Australians looking for responsible investment options. But it’s clear, advisers need to remain at the top of their game to keep up with growing demand from clients.

“Equally, fund managers who don’t transition will be left behind as the long-term value of non-ethical assets shrinks, our ethical approach has meant we’re well ahead of that curve.”

However, not all of the results were positive for responsible investing, with just 31 per cent of advisers indicating an increase in demand for responsible investing advice, compared with 57 per cent in 2022. Advisers that indicated a decrease in demand was steady year on year, while 54 per cent said the demand was the same, up from 29 per cent in 2022.

The proportion of advisers providing advice on responsible investments has also fallen to 46 per cent, down from 49 per cent in 2022 following several years of growth.

The majority of advisers surveyed (80 per cent) said that it is their responsibility to ensure their client’s investments align with personal values and principles, while 69 per cent said it is important to broach ESG investing with their clients to fulfil their best interests duty.

Additionally, there is strong demand for responsible investment among high-net-worth investors, with the report finding that highly driven responsible investors who primarily considered ESG principles when investing had on average almost $1 million invested outside of super.

The advisers surveyed also called for platforms to improve their ESG functionality, with 51 per cent requesting ESG ratings of investments. Tools to compare responsible and non-responsible products were requested by 37 per cent of advisers, while tools to identify responsible investments and compare them against each other were requested by 36 per cent.