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Responsible investors approach critical mass in Australia, but ESG’s hurdles still high
Recent research has underscored a now-familiar refrain about environmental, social and governance (ESG) principles: investors are increasingly aware of responsible investing but want greater transparency and access to information. While there’s still work to be done, the move to ESG is clearly building in momentum, prompting some cautious optimism about the future.
According to a recent Investment Trends report commissioned by Australian Ethical, awareness of responsible investing (RI) has jumped to 82 per cent from 61 per cent since 2021, and nearly half of 1,475 Australian investors surveyed said they now consider RI principles when choosing where to invest, while another one in three have intentions to do so.
The 2023 Responsible Investing Report found that 71 per cent of responsible investors are satisfied with the performance of their investments, while nearly three-quarters believe their returns will be on par with or better than returns from mainstream investments over the longer term.
Leah Willis, head of client relationships at Australian Ethical, said it was pleasing to see the continued momentum and growth in demand apparent across the three consecutive reports in the series, with the results indicating meaningful progress even as challenges persist.
While the research reflects the degree to which the responsible investment market has matured, it also shows investors are increasingly concerned about what environmental and social impact their investments are actually having. Greenwashing concerns are still the top factor people cite as turning them off from responsible investing.
“We continue to see greenwashing rise as a significant concern, both for investors and advisers,” Willis told The Inside Investor.
However, she added: “I don’t think that’s surprising, given that wherever there’s momentum and demand, there’s product proliferation. In some respects, it’s great, because there’s more choice, but it also provides more complexity and more things to navigate and understand.”
Performance ‘tipping point’
The results reflect that there is still a perception among some that investing responsibly and ethically requires a trade-off on returns, a misconception Willis said has persisted for years. However, growing conviction among ESG investors about the performance of their responsible investments also shows changing attitudes towards ESG.
“The proof point for me in this survey was the fact that those investors who have actually put their toe in the water and started to apply RI principles to their portfolio are actually feeling confident, despite the market challenges we’ve had over the last 12 to 18 months,” Willis said.
“We are starting to see that tipping point of investors looking at the potential outperformance of sustainability, with the amount and weight of money that’s going into the transition to a more sustainable future,” Willis said. “We think the thematic remains strong over the long term and should underpin returns for responsible investors.”
The power of individual capital
The ability of individual investors to make an impact through RI is easily obscured, especially amid the more intense focus on corporations’ contribution to climate change, and whether investors understand their individual and collective power is a big issue for ESG uptake.
“There’s a sense in society today of, ‘how can I possibly make a difference?’,” Willis said. “Absolutely, through investments and superannuation, you can make a difference.”
It’s a question of individual impact and capability to drive change through the allocation of capital, she said, whether through their investments, super or other banking products, or other financial decisions.
“We believe that making investment decisions that allocate capital in more sustainable, positive companies and sectors can potentially contribute to a better future for everyone. That’s our core, so we believe that individuals, through capital allocation, all have a choice, just like they do with consumption, to drive that capital allocation in a way that aligns with their values and the outcomes they want to see.”
At the moment, a “technical aspect” is that it’s difficult for retail investors to directly access to ESG in the Australian market, Willis said, with exchange-traded funds and pooled investments currently the main exposure points.
“The renewable energy sector is reasonably skinny – there’s only a couple of stocks here. Through a professional manager, you can access a much broader array of opportunities to be able to contribute to that decarbonisation thematic.”
But she added that, given the growing urgency driving the transition in Australia, “there’s no doubt that there will be more options for investors to be able to contribute positively to this thematic over the coming decade”.
