It shouldn’t come as a surprise that investors are putting greater emphasis on climate risk and ESG given the pronounced business and investor presence at COP26. Research from EY and Morningstar reveal the pervasiveness of this investment trend.
A new institutional investor survey by EY found that investors are looking to cash in on the “green recovery”, with 92 per cent of investors having made an investment because they saw it benefiting from government post-Covid stimulus programs designed to simultaneously tackle climate change and boost economies.
The report noted that investors were wary of this opportunity becoming a “victim of its own success”. Around 76 per cent agreed that a shortage of suitable green investments achieving a high sustainability score from ratings providers will lead to some investors overpaying for green assets, which could increase the risk of a market bubble.
The survey also found investors are taking corporate decarbonisation strategies very seriously, with 86 per cent of respondents targeting companies with “aggressive carbon-reduction initiatives” as part of their investment strategies.
Additionally, it found that 77 per cent of the surveyed investors would be running a fine-toothed comb over any asset allocations and selection decisions to determine the physical risks posed by climate change. This is up from 73 per cent from last year.
Similarly, investors will also be sinking considerable time into assessing transitional risks – 79 per cent, compared to 71 per cent in 2020.
The report did discover investor strategies to assess performance against climate risk were falling short of their apparent concern, with fewer than half of investors (44 per cent) reporting a highly mature approach and 45 per cent reporting “medium maturity”.
The report noted that the pandemic had heightened overall ESG awareness, with 90 per cent of investors surveyed attaching greater importance to companies’ ESG performance.
Greenwashing concerns remain prominent. Investors are taking the quality and transparency of ESG data very seriously, with 89 per cent of investors surveyed supportive of mandatory reporting of ESG performance measures against a set of globally consistent standards.
Australia’s sustainable investment landscape also looking strong
Retail investors are also pouring money into Australia’s sustainable funds. According to a recently released Morningstar report, at the end of the third quarter of 2021, retail assets invested in Australasia-domiciled sustainable funds reached a record $38.077 billion.
This represented an 11 per cent increase compared with 30 June 2021 and a significant 73 per cent increase compared with 30 Sept 2020.
Four fund houses dominated flows in the quarter, with Vanguard’s performance outstripping the competition at $623 million, followed by BetaShares’ $452 million, Dimensional’s $370 million, and Australian Ethical’s $236 million.
Despite the growth in the size of these existing funds, Australia’s sustainable funds market remains small compared to Europe and US and there were no new funds launched in the third quarter. The market for Australian sustainable funds is also quite concentrated, with the top 20 funds accounting for around 56 per cent of total assets.
In terms of performance, 52 per cent of sustainable investments had outperformed their peers in respective categories over a period of five years, which bolsters confidence in these products that they will generate solid returns.
Greenwashing is also a concern for retail investors. In July, the Australian Securities and Investments Commission (ASIC) launched a review to check that financial products or investment strategies are as “green” or ESG-focused as claimed.