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Ethical investing is no longer a niche area. In the last few years, there has been a significant increase in interest in the space as investors look to drive change with their investment dollars. Total assets under management in sustainable investment funds have doubled over the past four years to around USD 3.6tn1.
If we look at the U.S. as a guide, one third of all professionally managed assets is already managed with a sustainability objective in mind2.
Here in Australia, flows into ethical superannuation options are growing twice as fast as their non-ethical counterparts3.
The below chart compares flows into equity funds across the globe that either incorporate or do not incorporate Environmental Social and Governmental (ESG) criteria into their investment process.
Source: Morningstar, BetaShares. Morningstar universe defined as Global Open-End Equity Fund. ESG defined as funds with ‘Intentional Attributes: Sustainable Investment – Overall’.
The shift in investor preference is clear to see. While ‘ESG funds’ have been taking inflows, those not incorporating ESG have as a whole seen substantial outflows. As a result, more and more investment managers are incorporating ESG criteria into their investment process, or else they could risk losing out to more sustainably focused funds when trying to attract assets.
However, as the popularity of ethical investing grows, it becomes more important that investors properly understand how their money is used. As a result, we are seeing increased scrutiny from regulators as to whether funds labelled ‘responsible’, ‘ethical’ or ‘sustainable’, are in fact what they say they are.
What is Greenwashing?
Greenwashing can be defined as the process of conveying that a fund or company’s products are more environmentally sound than they are.
Whilst it may sometimes be the case, greenwashing is not always intentional and may simply be a mismatch of expectations or result from differing definitions of sustainability.
Intentional or not, regulators are turning their attention to addressing the problems of greenwashing. In March 2021, Europe introduced the Sustainable Finance Disclosures Regulation (SFDR), requiring European funds to disclose ESG and impact risks. More recently in the U.S., the Securities & Exchange Commission (SEC) launched a crackdown on overblown ESG labels and investigations into claims of greenwashing.
Locally, the Australian Securities and Investments Commission (ASIC) is conducting a review to establish whether the practices of funds that offer these products align with their promotion – in other words, whether the financial product or investment strategy is as ‘green’ or ESG-focused as claimed4.
What to look for and how to avoid it
Just because a fund is labelled ESG, does not necessarily mean it does not hold companies you might not expect to see in the portfolio.
There are many different approaches to ESG, with varying levels of stringency.
Some funds may apply screens to simply remove exposures such as controversial weapons and tobacco, others may make portfolio tilts towards ‘ESG leaders’ within industries, without looking to necessarily remove exposure to things like fossil fuels or armaments.
Therefore, when choosing a responsible investment fund, it is extremely important to look beyond the ESG label and check what the fund is actually holding in its portfolio, as well as what the fund’s stated process and objectives are, to ensure they align with your own personal views.
Research suggests there may be a gap between what many fund managers are incorporating into their screening process and what investors truly care about.
The below chart compares investor interest (% of investor searches) with issues screened by ESG funds (weighted by % AUM).
Source: RIAA benchmarking report 2020.
Issues such as fossil fuel production, human rights and animal cruelty sit at the top of investor concerns, but are not necessarily something that fund managers have aligned themselves with as part of their screening process.
As is the case before making any investment, proper due diligence is crucial.
ETFs have gone some way to make this process simpler. Typically, their holdings are completely transparent, so you can see exactly what you are getting exposure to, and the investment process of passive ETFs is also usually easy to understand.
The Betashares process
At BetaShares we understand responsible investing is very personal, and different people have different views on what they deem ethical or prioritise as key concerns.
It is for this reason that we have taken a very stringent approach across our range of ESG funds, incorporating a broad range of positive and negative screens, to create true-to-label products which suit a wide range of investors.
The additional oversight of a Responsible Investment Committee monitors for any controversies which may occur with companies held in the respective index, which may not have been a historical issue (see Facebook in 2018).
Our ESG suite is fully transparent, with portfolio holdings published daily on our website so that you as the investor know exactly what you are getting exposure to. Our factsheets also contain additional carbon data and information on alignment to Sustainable Development Goals (SDGs).
Further to screening, voting and engagement with the companies within the portfolio is an increasingly important feature when it comes to ethical investing. All our voting and engagement is visible to investors within the Regulatory Resources section of our website
You can find out more about ethical investing and our range of ethical ETFs here.
Further information on BetaShares’ sustainable investment and screening process can also be found here or on the individual fund pages.
1. IMF semi-annual Global Financial Stability Report, October 2021.
2. The U.S. SIF Foundation’s 2020 Report on U.S. Sustainable and Impact Investing Trends.
3. Source: APRA, SuperRatings, Australian Ethical reporting, Future Super member database. Includes super FUM within pure-play funds (Future Super, Australian Ethical, Christian Super and NSW Local Government Super), and FUM within ethical options at non pure-play funds (e.g. Australian Super sustainable option), between Mar-16 and Mar-20.