Too easy to make ESG claims under Australia’s lax rules, says Australian Ethical
Australia’s most successful ethical fund manager has called on the government to accelerate efforts to introduce a labelling scheme for investment products to stamp out the “greenwashing” of investments that aren’t quite what they claim.
As the wider investment industry rushes to jump on the success of investing around so-called ESG (environmental, social and governance) principles, Australian Ethical CEO, John McMurdo is urging local regulators to accelerate existing efforts to stamp out loose standards in the local market.
ESG-based investing has consistently outperformed conventional investment on many measures in recent years. But the sector now faces being swamped with poor imitations as an ever-widening list of investments come under the ESG banner.
Indeed, it seems it’s just too easy being green in our market at the moment: “What we have in this market is some people trying to hold themselves out as ethical investors without authenticity. It’s greenwashing and we do not want it here,” McMurdo says.
“I think we could usefully adapt the recent EU rules in this area.”
The EU labelling shake-up for investment products has imposed new rules for around a third of the world’s listed assets. The move has been lauded as a potential game changer in the global investment market: The Sustainable Finance Disclosure Regulations require all companies to have “tangible and measurable plans” on ESG products.
In contrast, Australia currently has no nationally recognised legal standards. Indeed our notoriously loose standards have given rise to leading companies having strong EGS “scores” that sit alongside major failures such as Rio’s Juukan Gorge incident last year.
One recent survey highlighted that 41 per cent of companies do not report it when ESG targets are not achieved.
Australian Ethical this week released a survey of more than 2000 individual investors which showed that ESG investment, as far as retail investors are concerned, is primarily about the “E” (environmental) factor, which surpasses all related concerns.
The result shows a cleave in the market between individual investors and institutional investors, who are more interested in the “G” (governance) factor. A report from Macquarie last year spelled out governance as its principal concern, with the bank suggesting it is the key factor which pushes the best companies higher and punishes companies that fail.
The latest survey – which was managed by the Investment Trends group – shows that environmental concerns are actually extending their dominance in the ESG space up, growing from being the primary concern of 58 per cent of respondents to 78 per cent of respondents in the latest survey, typified by concerns such as renewable energy, energy consumption reduction and the recycling of biodegradable waste.
ESG concerns also continue to be investor-led. According to the survey, “an estimated 55 per cent of new inflows allocated by financial advisers to ESG-aligned investments in the last 12 months were driven by investors”.
Australian Ethical Investment is the largest of the pure-play ethical funds, with around $5bn in funds under management: Early investors in the ASX-listed group have managed an eightfold return in recent years. It is currently trading at $8.08, which is close to the all time high it struck just before the Covid crash last year.
The one year performance of its Australian share fund was up 58 per cent while its Emerging Companies Fund (a small cap ethical shares fund) managed a 12 months performance of 80 per cent against a benchmark return of the small ordinaries over the same period of 6 per cent.