Responsible Investment Association Australasia (RIAA) research in 2024 discovered that 88 per cent of Australians expect their investments to be responsible and ethical, up from 83 per cent in 2022.
As the demand for responsible and ethical investment grows, Nanuk Asset Management noted the broad umbrella term “ESG” – an environmental, social, and governance framework – has been misunderstood by some investors.
Speaking on a recent IMAP webinar, Mark Jordan, senior business development manager at Nanuk Asset Management, said confusion around the term has prompted some Australians to abandon it altogether.
“The argument here is not against ESG practices, but against using the term to describe a range of different investing approaches. We think it’s caused confusion and misunderstanding when clients or advisers are looking at different investment options that align with objectives,” Jordan said.
“We’ve seen this problem arise over the past few years and it’s caused some investors or advisers to shy away completely from the responsible or ESG investment sector.”
Similar to the way that alternatives cover a range of non-traditional investment options, ESG, too, describes a wide array of strategies, Jordan said, such as negative screening and exclusions, impact investing or sustainable investment.
“When it comes to managed funds, this is where the ESG acronym has become probably overloaded. It means different things to different people, from exclusions to ethical screening to risk management and active ownership,” the senior BDM said.
“We think about the way the term has been used a little bit like using the term ‘alternatives’ to describe a broad and diverse range of investment strategies. Alternatives might be hedge funds, property, credit, infrastructure, and so on. It tells us very little about what the investment strategy is so when someone mentions the term alternative, there’s more questions. What are you talking about?
“That same thing needs to take place when we’re talking about ESG or responsible investment.”
To avoid overusing this umbrella term, he encouraged advisers to use more specific and plain language descriptions with their clients to clearly define their objectives.
This could include:
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Exclusionary, values-based negative screening.
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Systematic consideration of governance and sustainability traits.
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Engagement and stewardship activities.
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Sustainably themed investment.
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Low carbon investment.
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Climate change and climate transition alignment.
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Impact investment.
Jordan added: “The term ESG, or for that matter responsible investment, should not necessarily be used to represent a single concept – because it doesn’t.”
Referencing RIAA’s research, he said the rising demand for ESG investment is a key opportunity for advisers to provide further value and engagement with their clients on this topic.
“I’m pretty certain, I could be wrong, that advisers are not having these conversations with 88 per cent of their clients, so there may actually be an unmet objective that can be addressed in the advice process,” Jordan said.
“As the younger demographic starts moving through the investing life cycle, we would see that demand shift higher and there’s probably going to be a range of new funds and strategies that will actually come to market to suit investors going forward. There is demand, just in the short-term it can ebb and flow, but the long-term structural demand is growing.”
There are 600 different measures of ESG performance, none of them are highly correlated with each other, which is the correct set of measurements? I’m dying to know.
88% of people expect their investments to be ESG according to the survey. We’ve got 1,000 clients across 6 advisers and we have 2 clients who are ESG.
Hey Anon,
Do you offer insurance in your practice? I’d wager that <10% of your advice-seeking accumulators ask for personal risk unprompted - yet insurance is a core recommendation for most advisors, and rightly so. Broadly speaking, advice seekers want leadership and are open to ideas around all elements of their finances - including responsible investing.
Our practice serves accumulators and we have >90% of clients wanting a sustainable investment ’tilt’ within their portfolios. You’ll see similar results if you take as much care with this topic as the average aussie advisor takes when covering risk advice. Start asking the question properly.
I’ve got 200 myself and 1 ESG client. I applaud what James is achieving below and the niche he’s achieved, there’s some grey area as to whether or not we are compelled to enquire under ethical standards, personally I think it’s best left to market. Some advisers do, some advisers don’t. I’ve gone down this path previously my concern is the level of grift around the industry e.g. RIAA. My personal opinion is fossil fuels will still be essential in 100 years and corporate governance is not a priority for me as long as they’re making money. Tobacco, WMD’s etc. are generally excluded anyway.
Product providers coming through our office say their watering down and walking away from ESG, even the creator of the ESG scam Larry Fink has had a rethink. A positive to come with the change of Government in the US