Industry snapshot

Industry snapshot

Environmental, social and governance (ESG) investing is a question that has never been more prominent on the minds of investors. There is a growing recognition in the financial industry that ESG factors influence investor returns. At its heart, ESG investing is explicitly and systematically including ESG issues in investment analysis and decisions with the aim of better managing risks and improving returns.

Issues that have formerly been considered “non-financial”, such as climate change, are now being explicitly evaluated, disclosed and managed by companies, and fund managers and advisers are increasingly integrating those issues when developing portfolios. Investors are also evaluating the funds, products and managers on whether and how they manage ESG in their product development. Influencing this process are quickly expanding sources of data evaluating ESG performance both by fund managers themselves, and by third party data providers.

In addition to these developments within the investment management industry, consumer sentiment is also quickly shifting. Individual investors are clamouring for product that explicitly takes ESG investing into consideration.

Industry snapshot

Australia ranks with global peers when it comes to ESG investing. The Global Sustainable Investment Alliance (GSIA) publishes a biennial Global Sustainable Investment review, collating the results from the market studies of regional sustainable investment forums in Europe, the United States, Canada, Japan, and Australia and New Zealand. In the most recent report in 2018, Europe had US$14.1 trillion in sustainable investing assets, the US had US$12 trillion, Japan had US$2.2 trillion, Canada had US$1.7 trillion, and Australia/ New Zealand had US$734 billion in sustainable investment assets.

Rainmaker has identified 1200 ESG superannuation options in its research database, as at February 2020.

At a global level, institutional investors had 75% of assets under management while retail had 25%, according to the GSIA 2018 report. In Australia, retail has a larger share of the market. According to the Responsible Investment Association Australasia (RIAA)’s 2019 benchmark report, 42% of surveyed AUM managed on behalf of retail clients in 2018, up from 30% in 2017.

ESG integration both in product development and in evaluating managers for their performance on ESG investing is an evolving process.

This guide seeks to provide financial advisers with a framework to understanding how to define ESG investing and how it integrates into an overall investment process. This guide also features real-life case studies and performance data that will shine the light on this increasingly important section of the investment management industry.