- Why the outlook for ESG investing looks bright
- The 10 ways investors can drive positive change in the world in 2024
- And the 3 ESG themes that will shape the year
More retail investors on the ASX are embracing responsible-investing principles, avoiding companies that do social or environmental harm and favouring those that have a positive impact.
According to the 2023 ASX Australian Investor Report, a large proportion (31%) of retail investors said they would invest responsibly if returns were comparable.
“There is a growing body of research that shows you don’t have to sacrifice investment returns to invest sustainably,” said Perennial Partners’ Emilie O’Neill. “In Perennial’s experience, ESG investing can aid performance over time.”
O’Neill says the finding that Next Gen (aged 18 to 24) and Accumulators (25 to 49) are slightly more interested in avoiding harmful companies compared to pre-Retirees (50-64) and Retirees (65 or more) – is consistent with responsible-investing trends.
So, too, are gender differences towards ESG investing.
More men (19%) said investment decisions should not be made on ESG grounds compared to women (10%). However, there was little gender difference in overall adoption rates of ESG.
“The outlook for ESG investing this decade is positive as more women invest in shares, and as younger people inherit money through inter-generational wealth transfers,” says O’Neill.
“Younger people, in particular, don’t want their money invested in companies that hurt the environment or communities, or engage in unethical practices.”
10 ways ethical investors can make a difference
Morgan Stanley (MS) meanwhile has come up with a list of 10 ways retail investors can drive positive change in the world in 2024.
1. Understand the range of approaches available to create positive change
According to Morgan Stanley, investors need to understand the “Three I’s” of impact:
Intentionality of the investment process, which can range from reducing exposure to companies you find objectionable, to actively seeking out companies generating positive environmental or social impact.
Influence, which focuses on the role shareholders can play in helping change company behaviour for the better through active engagement.
Inclusion, which considers the level of diversity at asset-management firms and across investment professionals managing your portfolio.
2. Learn to identify asset managers that are driving authentic impact versus those simply claiming to do so
“The proliferation of sustainable funds in recent years can make it difficult to measure how much an asset manager actually prioritises environmental or social issues,” said Morgan Stanley.
3. Measure how well your portfolio is achieving alignment with your values
“A lack of standard industry metrics—coupled with competing measurement frameworks—has historically made it challenging for investors to determine how aligned their investments are with their impact goals,” said MS.
4. Consider investments that support the transition to a lower-carbon economy
“Those opportunities aren’t limited to the equity side of your portfolio. The proceeds of corporate green bonds, for example, go toward climate change mitigation activities or other environmental sustainability projects,”MS said.
5. …Or that help advance racial equity at companies and asset managers
“There are several approaches you can take in this area, including supporting diverse-owned or -run asset managers, or looking for investments in companies that are creating products or solutions aimed at addressing the needs of disadvantaged communities.
“You might also consider looking at the diversity and inclusion records of publicly traded companies and minimising or avoiding exposure to companies with lagging racial-equity records,” according to MS.
6. … Or that support equality for women in the workforce
MS says a financial advisor in this case can help find the right strategies, whether those involve shareholder efforts to increase gender diversity in the C-suite or boardroom, or investing in businesses with products and services that benefit women and girls.
7. … Or that improve people’s lives through access to education, health care and housing
“For example, investors can support affordable housing, community development, schools and even provide access to lower-cost clean energy in diverse communities through bond funds,” said MS.
8. If religion plays an important role in your life, explore faith-based ways to invest
“Many people look to their faith for guidance when making decisions to positively impact the world.
“Investment strategies based on the values of Catholicism, Christianity, Judaism, Islam or other faiths may help you align your investments with your faith traditions,” MS said.
9. Think about how your impact goals fit into your broader financial picture
“There’s no need to sacrifice your financial goals to invest according to your values.
“Whether you’re focused on building wealth, preserving it, generating income or other objectives, there are many ways you can integrate your impact goals for investors of all sizes.”
10. Consider working with a financial professional to help you invest with impact
Some financial advisors (like MS) are equipped with a broad range of robust tools, research and other proprietary resources to help build a portfolio towards your impact goals.
“Our Financial Advisors with the special Morgan Stanley Investing With Impact Director designation can share investment ideas that help meet your environmental, social and financial goals.”
3 ESG themes to shape 2024
Meanwhile, Chief Responsibility Officer at Janus Henderson Australia, Michelle Dunstan, has provided her outlook on the three ESG themes that will shape 2024.
Enabling the transition to a sustainable economy
“The speed of progress will inevitably depend on the vagaries of politics,” said Dunstan.
Next year sees elections for the next US president, UK prime minister, India’s government and parliament, and European Parliament members that will shape the path of ESG regulations, and commitments on climate goals.
“We have written before that governments must lead on climate action, while also providing incentives for companies and investors to help attract private capital.”
Dunstan added that investors are also beginning to think about tackling nature loss.
“We believe the transition to a nature-positive1 world will accelerate in 2024,” she said.
Social factors come to the fore
“Sustainability challenges can only be tackled – and solutions only be sustained – through addressing societal impacts and dependencies,” said Dunstan.
“A transition that fails to account for these social impacts and dependencies can create risks for people, companies, and even entire regions, as well as potentially negatively impacting cashflows and valuations.”
Human rights will be a focus area, says Dunstan, and this will be supported by the forthcoming European Parliament Directive on Corporate Sustainability Due Diligence (CSDDD), which will require large companies to undertake due diligence on their own activities and that of their suppliers.
The end of greenwashing?
“Corporate and investor commitments on key ESG issues need to be genuine and credible, something regulators and broader market participants are acutely aware of,” said Dunstan.
“Amid a flurry of bold green claims from companies and financial institutions in recent years, there has been a welcome regulatory focus on greenwashing, which will increase in 2024.”
“We expect those companies that show genuine leadership on ESG issues to be increasingly differentiated and have a premium, as regulations become more stringent and management of ESG issues becomes a key criterion for financial decision makers,” she added.