Horror summer prompts ESG product focus

As markets continue to digest the potential impacts of coronavirus on global economies, it should come as no surprise that there were few product launches in February as investment managers stood back. So, last month we took the opportunity to look at some recent product trends.

A key theme following our horror summer, and an increased focus on climate change, has been sustainable or ESG (environment, social and governance) investing. This is apparent for both retail and institutional investors.

ESG investing

In the most recent edition of Cerulli Associate's Asian Monthly Product Trends, the global researcher has highlighted a 23 per cent increase in 2019 in Australia's mutual fund assets in sustainable investments. This has increased from $54.3 billion in 2018 to $66.8 billion in 2019, with an increase in inflows of $1.2 billion over the same period, according to Cerulli's estimates.

"One reason for the jump could be Australian investors' increased awareness of climate change," Cerulli says in the report.

Even before the bushfire crisis hit, climate change was an increasing concern to Australians with it topping the list of potential threats to Australia's vital interests in the next 10 years, according to the Lowy Institute Poll 2019 (a survey of randomly selected Australian adults) released in June 2019. Of those polled, 64 per cent said climate change was a critical threat.

Yves Schoof is a financial adviser and managing director of Affluence Private Wealth in Western Australia.

"What Im really noticing is a lot of younger clients are asking about ethical and sustainable investing primarily [as a result of] the bushfires," he says.

"The scale of the events has prompted people to make that shift."

Schoof says this younger client base (between 30 and 45 years of age) are looking for superannuation funds that avoid fossil fuels, and while clients are still cautious and want ESG options that don't cost them in performance or fees, for the majority sustainable investing is the overriding concern.

As for products to suggest to such clients, Schoof said it was hard to find an ethical product that covered most asset classes along with global and domestic shares.

"When it comes to the managed fund space, even with ETFs you can only buy sector funds, for example Australian ethical shares," he says.

"So one of the biggest challenges is to find a diversified product...if you wanted to go ethical you would either have to go fully Australian or fully international [or] you have to piecemeal a portfolio for clients."

Debbie Lin is a financial adviser at Liquidity Independent Advisers. She has also noticed increased interest in ESG among some of her younger clients.

"There is a shift towards the more sustainable products and more ethical investments probably in the more younger area," she says.

But as the majority of her clients are retirees they are currently mainly concerned with low interest rates and the low yield on their investments.

ETFs

Lin uses exchange traded funds (ETFs) with her clients a lot and has been pleased to see recent developments and the launch of more active ETFs.

"I think products have innovated and ETFs have come along way," she says.

"There are a lot more [now] that aren't just an index."

Schoof is also noticing an increase in popularity of ETFs.

"I think people are becoming more used to the idea of ETFs and what they are and how they work," he says.

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