More want to invest ethically, but one thing’s holding them back

Many investors say they are willing to invest ethically but hold concerns over potentially falsified green claims, citing a lack of independent information among their reasons for holding off.

Only five per cent of respondents to a survey conducted as part of a report by the Responsible Investment Association Australasia (RIAA) had negative sentiment towards investing ethically, compared to 2000, when 29 per cent said they were reluctant to invest ethically.

Australian Ethical chief customer officer Maria Loyez says a lack of confidence in identifying truly ethical financial products risks causing inertia among potential investors.Credit: Oscar Colman

Yet 78 per cent of respondents said they have concerns with “greenwashing”, where claims are made about the ethics of an investment that cannot be substantiated, up from 72 per cent in 2022.

The Australian Securities and Investments Commission (ASIC) has been cracking down on superannuation funds and asset managers engaging in alleged greenwashing, which is likely weighing on the minds of those who would like to make environmental, social and governance (ESG) investments.

Almost 80 per cent of the more than 2000 adults surveyed said they would be more inclined to invest in products labelled as responsible or ethical by an independent source.

The RIAA promotes ethical investing in Australian and New Zealand and runs a certification program for responsible financial products, including super funds and managed funds, among other types of financial products.

Maria Loyez, chief customer officer at Australian Ethical, which co-sponsored the RIAA research, says the report reveals a lack of confidence in identifying truly ethical financial products and this risks causing inertia among potential ESG investors.

Australian Ethical was recognised as a “leader” for its adherence to ESG principles in a study released last year by Morningstar of 100 fund managers from around the world.

Loyez says the report shows the importance of making independent information available, so that investors can have confidence they are investing in accordance with their values.

Top concerns among those surveyed include animal cruelty, nominated by 66 per cent of respondents, followed by human rights abuses at 60 per cent. Next-most nominated include gambling, tobacco, weapons, firearms and corporate tax avoidance.

Gambling is among the top concerns.Credit: Edwina Pickles

“There is a lot more reporting on modern slavery, human rights and geopolitical conflicts and reports about the effects of gambling on families,” Loyez says.

“Despite animal cruelty being the top issue for consumers in the report, only 11 per cent of Australia’s superannuation and investment sector is invested in funds that screen out investments in companies that conduct animal testing,” she says.

There is some evidence that ESG fatigue may be setting in after many years of strong growth.

Marc Jocum, product and investment strategist at exchange-traded fund (ETFs) provider Global X, says almost 17 per cent of the net flows into Australian-listed ETFs were directed towards ESG in 2022.

However, their appeal has now dwindled to its lowest point in six years, with ESG net flows making up only 5 per cent of the total net flows to Australian-listed ETFs.

Higher interest rates may have something to do with it, Jocum says.

During times of higher rates, investors tend to place more value on companies showing immediate profits, rather than those whose profits are longer-term – the sorts of companies often associated with ESG investing strategies, he says.

Emerging themes, such as artificial intelligence, are also competing for investors’ dollars, he says.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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