Are investors becoming more ethically conscious?
04 May 2022
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.
ESG and Ethical investing
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 Association, 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 Association predicts ESG assets will exceed US$60 trillion by 2026.
Related article: Ethical investing in Australia: How to get started
Demand for ethical investments are 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% 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% of consumers expect financial advisers to be knowledgeable about responsible investment options.
How do ethical investments perform?
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.
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This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.
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