Photo by Krisztina Papp

If money talks, then Australians are increasingly declaring the importance of sustainability in how they select their investments. However, with that comes the need for greater oversight and restrictions to avoid greenwashing and ensure the growing billions of dollars in “sustainable” funds is actually making a difference 

FEATURE: As of July this year, retail assets invested in sustainable funds in Australia and New Zealand topped $33.4 billion, according to a new report from global financial services company, Morningstar.

The amount represents an 18 per cent increase compared with 31 March 2021 and a 66 per cent increase compared with 30 June 2020

In the second quarter of this year alone, a record $2.9 billion flowed into sustainable funds. 

“This is just kind of a continued trend of more people talking about this and then obviously kind of voting with their dollars,” Christopher Franz, Morningstar’s manager research senior analyst and ESG strategist told The Fifth Estate. 

Australia was one of very few places globally which had increased flows in the second quarter and I think that’s somewhat a function of the attention locally that’s been placed on sustainability. 

christopher franz

Despite the encouraging progress, Australia’s sustainable funds market remains relatively concentrated, with the top 20 funds accounting for 58 per cent of total sustainable assets. 

Christopher Franz

The two dominant sustainable fund operators by far are Australian Ethical and US investment group Vanguard, each with a market share of around 20 per cent. 

By Morningstar’s in-house ranking scale, Vanguard actually placed on the lowest tier of commitment to ESG investing.

Mr Franz pointed out that particularly for the larger firms, the ship is slow to turn, with progress sometimes being made by specifically ESG funds, while across their broader operations old habits, and company ties, died harder. 

“For somebody who’s managing that much money, it’s a lot of responsibility,” he said. 

Morningstar gave the reason for Vanguard’s low ranking as its “efforts do not stand out upon close inspection.

“ESG strategies have a long history at Vanguard, but they amount to only a fraction of assets under management.”

What is a sustainable fund? 

Morningstar identified 135 “sustainable funds” throughout Australia and New Zealand, with three new funds launched in the second quarter of this year.

Labelling a fund as sustainable is limited to measuring intention, rather than effectiveness, meaning Morningstar defines a strategy as a “sustainable investment” if it describes itself as such. Although it is a requirement that sustainability be a central part of the investment process and not merely “considered”.

“It’s easy for a manager with the current regulation to just tick the box to say they are sustainable in their product disclosure statement (PDS) and their filings,” Mr Franz explained.

Of the funds assessed by Morningstar, 65 were categorised as seeking to have a measurable impact on reducing carbon/fossil fuel emissions or environmental issues. 

Not excluding those, 19 intended to invest in companies in the renewable energy sector.

Australians have the most choice when investing in funds that utilise ESG incorporation techniques, but there are fewer choices in terms of funds that invest in an impact manner or when it comes to environmental sector funds.

Source: Morningstar Direct. Data as of 30 June 2021. Identification of sustainable fund types are not mutually exclusive.

As Franz pointed out, the sustainable funds sector was growing, and with it investors’ ability to seek out those funds that did aim to have an impact across a specific area or broader ESG outcomes. 

“Whether that be like a green bond strategy, or impact investing strategy, we’re starting to see some more launches on that space which I think is really encouraging because that’s where you can really point to tangible outcomes,” he said.  

Mr Franz added that globally, efforts were being made to ensure those marketing themselves as sustainable are actually so.

ASIC to investigate greenwashing 

In an effort to ensure financial products and investment strategies adhere to their green or ESG claims, last month the Australian Securities and Investments Commission (ASIC) launched a review of the space, reflecting a similar clamping down overseas.

There is growing global unease about the risks of greenwashing of financial products – partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area.

cathie Armour, asic commisioner

Mr Franz said that ASIC may consider introducing clearer criteria for what can and cannot be defined as an ESG fund, as the European Union did recently with the introduction of the Sustainable Finance Disclosure Regulation (SFDR).

The US Securities and Exchange Commission also recently announced a task force to identify greenwashing in ESG disclosures and New Zealand announced mandatory climate disclosures for financial organisations, set to take effect in 2023. 

Asset management rankings 

With such a varied definition of “sustainable fund” Morningstar recently began a new assessment strategy whereby it assigns an ESG commitment level to strategies and asset managers on a four-point scale: Leader, Advanced, Basic, and Low. 

“What that’s doing is offering kind of a qualitative opinion of how well we think asset managers and strategies actually incorporate ESG,” Mr Franz said. 

BlackRock merits only a Basic rating

He used global investment manager BlackRock as an example of a company that was publicly committed to ESG, but behind boardroom doors still had room for improvement, receiving an asset manager ranking of Basic.

Larry Fink, BlackRock

“They’ve really been at the forefront of trying to integrate ESG and trying to make a lot of noise on this, which certainly is a good thing,” Franz explained.

“But looking at their voting record, I think that’s a work in progress. Their most recent voting record that came out I think was strong, and they tended to vote more in terms of ESG type resolutions than they have in the past.

“So even with the power that they wield as an asset holder, how they engage with companies I think has been a work in progress.” 

Mr Franz clarified by saying BlackRock’s trajectory on ESG was impressive and that company boss Larry Fink was ahead of the industry in many ways. 

“The annual letters that Larry Fink writes are required reading in the space and how he’s going to try to hold companies accountable, so we’re trying to give them some kudos there but also keep in mind that they have so many different offerings and not every one of them is obviously ESG.” 

Four firms received the top-tier Leader assessments, including Australian Ethical, however 10 asset managers received ESG Commitment Levels of Low which included the largest by market share, Vanguard.

According to the report, these 10 asset managers have “only recently incorporated ESG considerations into their various processes or are doing so in a limited way.” 

Among the stand out performers in terms of strategy were the Sustainable Funds Group team within Stewart Investors, with two of their locally offered strategies receiving ESG Commitment Levels of Leader. 

Additionally, Affirmative Global Bond and its parent company, Affirmative Asset Management, both received ESG Commitment Levels of Leader. 

What does the money say? 

According to a recent consumer research report by the Responsible Investment Association Australasia (RIAA), 86 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically.

Word is also out that this can be done without harming returns, with 62 per cent of those surveyed saying ethical or responsible super funds perform better in the long term, up from only 29 per cent in 2017.

It’s good news for the planet, with these billions in investments holding the potential to make a positive change, backed by the will of those on the ground.

However, for now at least until the state of affairs remains firmly buyer beware as market regulators rapidly catch up to the new age of sustainable investing.  

“If you’re continuing to have investor interest in this space, obviously, asset managers are going to follow suit, that’s the business model,” Franz said. 

“So just ensuring that people are getting what they’re buying is really important.”

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