Has ESG Investing Gone The Way Of The Dinosaur

Many Australian investors want to align their investment decisions with their environmental, social, and governance (ESG) values. Funds poured into ESG assets during the pandemic. How have returns from investing in ESG assets fared?

For many Australian investors, aligning their financial decisions with their environmental, social, and governance (ESG) values is increasingly important.

While strong returns during the pandemic sparked interest in ESG assets, questions remain about their current performance. So, how are ESG investments faring today? Is it a case of picking winners?

Understanding ESG

In essence, ESG investing involves directing your money towards companies and funds actively contributing to a positive environmental and social impact.

It’s often referred to as sustainable or green investing. The acronym itself stands for:

  • Environment: How does the company manage its environmental footprint? Does it utilize renewable energy?
  • Social: What are the company’s social practices?
  • Governance: How do management and the board address various stakeholders’ interests?

Independent research organizations often evaluate public companies based on these factors, providing objective ESG scores.

Entering the ESG Market

ESG funds, either mutual funds or ETFs, incorporate these considerations into their investment strategies.

Some actively seek companies with strong ESG performance (positive screening), while others exclude those involved in controversial activities (negative screening).

By choosing these funds, you align your investments with your values and support companies prioritizing sustainability and responsible practices.

Active vs. Passive Approaches

ESG funds generally utilize one of two portfolio construction approaches:

  • Passive: These funds track an index comprising companies meeting preset ESG criteria. Fund managers build a portfolio mirroring the index’s performance.
  • Active: These funds actively research and pick investments based on their own ESG criteria.

Investing in Australia

Over 30 ESG ETFs currently trade on the ASX. Have they delivered on returns? While interest remains high, the answer isn’t straightforward.

Performance Nuances

The diverse range of ESG funds reflects varying interpretations of how the acronym should be applied.

Labeling terms like “climate leaders,” “elite,” “ethical,” and “Paris-Aligned” add another layer of complexity.

As yet, there is no agreed definition. Perhaps therein is the challenge for the sector. Portfolio composition is all important.

Several specific ESG ETFs, like those from Betashares and Smartshares, have outperformed their peers.

At a global level, Scientific Beta reports a marginal underperformance of ESG ETFs compared to traditional ones overall.

Conclusion

It’s crucial to remember that ESG is an evolving investment theme with growing interest across various investor demographics.

Certainly, funds poured into ESG funds during the pandemic.

While data suggests some ESG ETFs outperform their peers, they are a mixed bag in terms of performance and overall returns.

Time and further analysis will paint a clearer picture of ESG’s long-term performance.

Interest in ESG consumerism from millennials and Gen Z demographics continues to surge. It would not take much for a flow of money to set ESG investments alight.

Clearer definitions of how ESG should be applied would assist the cause.

 

 

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