Oz leads world in ESG options

Australia has one of the largest offerings of climate-related managed funds and exchange traded funds in the world, according to Morningstar Australia Research. Morningstar Australia ESG analyst answered some questions from Industry Moves about why this is the case.

Why do you think there has been an increase in climate-focussed investment options over the past 12 months?

Managing climate change is a global focus kicked off by the Paris agreement in 2015 when many nations agreed to address climate change by reducing greenhouse gas emissions to combat temperature rises. What has caused an increase in climate focused investment options in the past 12 months is multi faceted; Cop 26, a change in US administration, increased adoption of sustainable funds and a rapid growth in industry collaborations such as the Glasgow Financial Alliance for net zero have all contributed.   I think it's both demand and supply driven, there has been both increased offshore regulations, the sustainable finance disclosure regulation in Europe increased demand for climate related investment solutions for example and investor demand which has resulted in more products coming to market.  

Do you think this trend will continue or might it slow down soon?

Personally, I see this trend continuing, we have seen assets related to mitigating climate risks increase at a rapid pace. Our data demonstrates globally investments in climate funds have doubled in 12 months.  Mitigating climate risk is a global focus that is unlikely to dissipate.

Climate-focussed funds have enjoyed a period of outperformance but with prices for traditional energy sources increasing, is this about to change? What message do you have for climate-focussed investors worried about performance?

Climate change poses the biggest long-term threat of our time, impacting not only how we live but how we invest.  There are some estimates the global economy could shrink by 18 per cent in the next 30 years if no action is taken to mitigate climate change. However, the path to net zero is uncertain, what we do know is that we need to reduce our reliance on fossil fuels, coal oil and gas and we need to invest into climate solutions. Special United Nations envoy for climate action and former bank of England governor, Mark Carney, calls the move the net zero the greatest commercial opportunity of our time. 

In the short to medium term there will likely be price fluctuations as the world transitions to net zero and during this period of transition traditional energy sources may do well, but in the long term the trend is clear, the world is committed to net zero to combat climate change.  The risk of traditional energy sources becoming stranded assets is high.  My message to investors is to think long term and think about which companies are well placed to manage the transition to net zero.