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‘Green is the new black’: ethical investing gains momentum

Emma Rapaport  |  21 Dec 2018Text size  Decrease  Increase  |  
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Most investors are these days putting values alongside returns and pressuring fund managers to act more responsibly.

Whether it's concern about climate change, environmental issues, the ways companies treat their workers, or the promotion of unhealthy products, almost 50 per cent of investors are aligning their decisions with their values.

More than 50 per cent of global investors say they avoid businesses with controversial track records, according to the Legg Mason Global Investment Survey 2018, and an overwhelming majority of investors believe that fund managers should actively “police” companies they invest in.

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Investors are confused about what ESG-investing is and how to identify quality investments

Global investment management firm Legg Mason asked 17,000 investors across 17 markets globally about their view on ESG – or environmental, social and governance investing.

Fund managers have jumped on the trend in 2018, creating an array of funds to cater to the responsible investor. This year, in the US alone, more than 30 new funds were launched (17 open-end funds and 14 ETFs), and 55 existing funds added ESG or "impact criteria" – investments that seek to benefit society or the environmental alongside a financial return - to their investment processes.

By contrast, in 2017, 27 funds were launched, and 17 existing funds added ESG or impact criteria. There are now 341 sustainable open-end funds and ETFs available to US investors, according to Morningstar's head of sustainability research Jon Hale. The trend is gaining traction among Australian investors too.

Some of the world's fund manager titans are increasingly urging companies to consider ESG. BlackRock, the world's largest asset manager, is a case in point. Its chief executive Larry Fink began the year by sending an open letter to corporate CEOs, urging them to think long term, act in ways that will benefit all stakeholders, and focus on how their firms make a positive contribution to society.

The sustainable funds universe in Australia is growing, albeit slowly. Investment managers including Ausbil and Alphinity Investment Management launched new ESG funds this year.

Australia's responsible investment industry had $886 billion in 2017, up 22 per cent from the previous year, according to the Responsible Investment Association of Australasia. Most of this $886 billion is managed by firms taking ESG into account. The rest screen out – or exclude – investments deemed to be unethical or invest to make a positive impact.

However, people are still confused about what ESG-investing is and how to identify quality investments, according to Legg Mason report.

More than one in four global investors surveyed said a lack of information on sustainable investments prevents them from investing more of their portfolio in these assets. And one in four people say they’re unsure which investments take a sustainable approach.
People are confused because of unclear product classification and they feel there is little quality advice.

Every fund claims to prioritise ESG, but the consensus about the definition of ESG is blurred, Morningstar's Hale says.

"Some funds have simply added a reference to ESG in their prospectuses, an indicator to investors that ESG is a material factor for the fund but not necessarily the determining factor for security selection or portfolio construction," he says.

"Others clearly use ESG criteria as key factors in both security selection and portfolio construction, while others include impact beyond financial return as an investment objective."

In Legg Mason's view, investors need more guidance if they are to take a clear-headed view on what they consider when looking at ESG metrics.

is an editor for Morningstar.com.au

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