Growth in ESG investing, an opportunity for advisers

Whilst the adoption of ethical investment solutions has been on the rise over the past decade, the intensified media coverage following a summer of natural disasters has prompted more Australians to look for ways to lessen their environmental footprint, including how their investments may be contributing to these events. This, along with a generation set to inherit substantial wealth and actively embracing ethical investing, it will likely result in a greater proportion of investible assets in ethical investment options over the coming years.  Advisers who are educated on the options available for ethical investing will be in a strong position to cater to this growing market of investors.

The ethical investment landscape

On a global scale, Australian investors are already one of the most active supporters of responsible investing, ranking fourth for ESG investment awareness, with almost half of Australia’s superannuation savings in funds and investment managers that follow ESG investment principles. And it’s not just industry funds, 42% of responsibly managed AUM was on behalf of retail clients in 2018, up 30% on the year before. (Source: Responsible Investment Association Australia (RIAA) Benchmark Report 2019)  

With this growing demand is a growing number of investment options. The challenge for advisers is becoming educated not only on the various investment choices, but the many nuances of each fund’s screening process and how this aligns with a clients’ ethical considerations. The key is finding an investment strategy that allows investors to feel they are making an impact with issues that really matter to them.

There are a large and growing number of Exchange Traded Funds (ETFs), managed funds and managed account model portfolios managed with an ESG philosophy. Managed accounts with their ability to lock and substitute holding have always allowed advisers to remove specific stocks from a portfolio. Managed account platforms such as Praemium are taking that a step further, by providing the functionality to negatively screen portfolios on the basis of ethical considerations in bulk, efficiently and accurately at the touch of a button. The screening service increases the available solutions advisers have to deliver on client ethical investment objectives, whether they elect to build bespoke custom portfolios, utilise an existing SMA with the screening services or invest into specialised ESG strategies.

The recent exponential growth in these investment solutions indicates that investors are embracing ESG more widely, particularly given the long-term track records of these solutions are showing similar or better returns to mainstream funds and he standard market indexes. (Source: RIAA Benchmarking Report 2019) This debunks the once held belief that ESG portfolio performance is negatively impacted by a smaller investible universe.

Millennials driving the change

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The millennial generation (born between the early 1980s and early 2000s) have been leading the shift to socially responsible investing, with 95% of millennial investors prioritising socially responsible investing, according to research conducted Morgan Stanley.

Whilst risk and return profile, past performance and asset allocation are all important factors in millennial’s investment decision-making, their primary concern is selecting companies that they believe will have a positive impact on the world.

This generation are more socially-minded than any generation before them and are looking for progressive and forward-looking investment solutions. They are also going to be the recipients of the largest generational transfer of wealth in history, with around $30 trillion set to transfer from the baby boomers to millennials over the next decade.

The adviser’s role

There is however a disconnect between the interest in ESG investing and adoption. With around 80% of the general population (95% millennials) interested in ESG investing, only two-thirds of these are adopters. Contributors to this are a confusion of terminology, opacity as to the ethical credentials of an investment, and uncertainty as to how investments actually align with an investor’s ethical considerations.

This is where informed and well-prepared advisers can cut through the confusion and help clients achieve their investment goals in a manner in keeping with their personal ethics. It also offers a new engagement opportunity with existing clients and can enhance the adviser-client relationship as you get to understand more about what is important to your clients. As awareness and desire to make a positive impact on the planet grows, existing clients are likely to consider these solutions in the future as well.

Last year APRA outlined the fiduciary duty to consider ESG issues in the management of funds in light of the changing investor demand and awareness. As momentum behind this style of investing grows and companies themselves adopt an ESG mindset, ESG investing is only going to continue to grow. The engagement opportunities and potential for new client acquisition is only positive for advisers.