Capital flows into ESG investments are the “undisputed success story” of the global funds management industry over the past two years, network platform Calastone says.

But in terms of global fund flows, Australia is “about two years behind the curve” compared to market leaders in the UK and Europe.

The observation was part of a broader research piece on capital flows in the active vs passive battle, following the rise of the huge passive investment players such as Vanguard and Blackrock.

ESG stands for Environmental, Social and Governance and relates to investment strategies based on stocks and sectors that meet a standardised set of criteria around issues like environmental impact and corporate governance.

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Headquartered in London, Calastone is processing around $360m of investment trades per month and is the world’s largest global funds network.

And while passive investment flows continue to rise, it’s ESG funds that have “captured the investor imagination” over the past two years, Calastone said.

For every $US100 of new funds flowing into the Calastone network over that period, an “astonishing” $US84 was allocated to funds that meet globally recognised standards for ESG.

In dollar terms, that equated to $US15.1 billion out of total inflows of $US18.1bn.

In addition, “the last four months of 2020 saw greater inflows than the rest of 2020 and all of 2019 combined”, Calastone said.

Australia ESG

But globally, it’s UK and European investors who are demonstrating a stronger preference for ESG investments.

Calastone said a key turning point came in late 2017, when environmental issues “broke through irreversibly in the national consciousness and began to generate real change”.

However, that trend hasn’t picked up at the same pace among Australian and Asian investors, who are about “two and three years behind the curve respectively”.

While attitudes are beginning to shift, Calastone’s regional director Ross Fox said that divergence partly reflects a preference among local funds to invest in Australian stocks.

However, the home-market bias “leaves investors with fewer assets that would meet global ESG standards”.

“Australians are pretty patriotic when it comes to their investments. More than a third of the money they added to equity funds in 2020 went into funds that only invest in Australian equities,” Fox noted.

That differs from the UK, Europe and most of Asia where investors take a more global view.

Fox said that while the discourse around ESG in Australia’s financial services industry is picking up, the topic is “still more muted than in the UK and Europe”.

On a company level though, Australia does have individual ESG success stories such as listed investment group Australian Ethical (ASX:AEF) which avoids investments in gambling, fossil fuels and the bulk of the mining sector and has seen funds under management grow rapidly.

One factor complicating the ESG outlook is that debate remains ongoing about what constitutes a standardised set of ESG investing guidelines.

But with the rapid inflow of new capital, Calastone said that had worked in the favour of active managers after years of losing market share to passive funds.

With ESG standards still evolving and much debate ongoing about the rigour of different benchmarks, many fund managers are doing their own detailed in-house screening of stocks, giving them a compelling marketing message.