Not just a fad - ESG products come into their own

By Penny Pryor

One of the biggest trends in products this year has been the move towards more standalone Environmental. Social and Governance (ESG) or socially responsible options, or including an ESG screen in any product a fund manager launches.

This trend has been apparent for some time but has really taken off over the past 12 to 18 months, according to chief executive of the Responsible Investment Association of Australia (RIAA), Simon O'Connor.

"I think just the momentum in this area of responsible investment has only accelerated in the last year or two, to a point where really, there's very few of our major super funds and fund managers in the country, and indeed, banks or insurers, who don't have strong commitments, around responsible investment and are developing in detail their own approaches to this," O'Connor told Industry Moves.

According to the Responsible Investment Association's 2021 Australia Benchmark Report, of the total $3.199 trillion professionally managed investment market in Australia in 2020, $1.281 billion was responsibly managed. That represents 40 per cent of total professionally managed assets and is an increase on the 35 per cent of total assets which responsible investment represented in 2018.

There are three main drivers of this, according to O'Conner - a focus by regulators, increasing evidence for superior performance by ESG and/or sustainable strategies, and investor demand.

In fact, many investors are becoming increasingly frustrated with the lack of action by some governments and are using their investment capital to effect change where they can.

A recent YouGov poll for the Australian Conservation Foundation, found that one in four voters rate climate change as the most important issue to determine their vote at the next federal election, followed by an additional 39 per cent who rate it as important. Interestingly, half of coalition voters want greater action on climate change.

Unfortunately, with the increase in ESG interest has come an increase in 'greenwashing', so it is very important for product issuers to be able to back up any claim they make about their fund's ESG credentials.

RIAA runs a certification program for products which can help investors wanting to make sure they are choosing a responsible investing approach.

"We're seeing just a massive surge in interest in a certification labelling program that we run that certifies investment products as responsible and true to label and does a really deep dive due diligence on products to ensure that those claims are substantiated and able to be delivered," O'Connor said.

RIAA currently have over 200 products certified with another 75 sitting in the pipeline and have also experienced a rapid growth in membership.

"The rate of growth of assets under management from leading responsible investment funds is growing at a faster rate than the non-leaders and the inflows into products that are responsible are just huge as well. So, all the signs are really strong momentum, it's attracting funds, it's performing better and more of the market is taking it up," O'Connor said.