Retail sustainable investments grow by 21%: Morningstar

Retail investment in sustainable financial products rose to $19.9 billion by the end of June 2020, a 21% increase on the previous year, according to research from Morningstar.

Morningstar recently released a report, Sustainable Investing Landscape for Australian Investors, which found that sustainable fund launches have increased materially over the past three years. Although still a small percentage of the total launches, ten additional sustainable fund vehicles were launched by the end of August 2020. A total of 14 sustainable funds launched in 2019.

Morningstar has identified 108 Australia and New Zealand-domiciled sustainable investments through their intentionality framework. The sector is not only growing, it is also showing performance, particularly through the volatile 2020 period. Morningstar noted that "following the volatility in the first quarter, estimated net flows to sustainable funds were muted in the second quarter but still positive at $335 million."

"We're certainly seeing the demand for ESG and investing become more broad-based and we're hearing that from our adviser community," said Jamie Wickham, managing director of Morningstar Australasia, at a briefing on the report with colleagues at a recent Morningstar virtual conference.

"There's been a shift in the adviser landscape with a call for more transparency and a focus on outcomes ... Advisers are thinking about sustainable investing as part of their offering, and particularly in a context of personalizing the advice."

The research found that 70% of sustainable funds placed in the top half of their respective Morningstar Category peer groups during the first half of 2020, providing additional evidence that investing sustainably does not necessarily come at the expense of returns.

"This is now resonating more strongly with individual investors, and therefore is it just an opportunity for those that serve that community," said Michael Jantzi, founder and CEO of Sustainalytics, which is now wholly owned by Morningstar. "I've been doing this for a long time, close to 30 years, and while this market globally really started with the individual investor, the reality is that over the last 10-15 years, the mainstreaming of ESG has been underpinned by institutional investors - asset owners and the large asset managers that serve them. That's not a bad thing, but its' a reality."

The momentum is shifting back to the retail sector in Australia, but market developments in Australia are outpaced by other markets, said Grant Kennaway, director of manager research for Morningstar.

"Australia is coming off a low base," Kennaway said. "We're way behind Europe and the US.  ... The European Union is bringing out the taxonomy on sustainable development. A lot of the European developments will flow through to the Australian marketplace. That's something for the marketplace to keep an eye on. If the Australian industry doesn't step up, we'll receive what's coming up in Europe."

Morningstar has identified 87 Australasia-domiciled sustainable funds that employ some form of exclusion from investment in controversial areas, with a 85  funds excluding tobacco and 81 excluding controversial weapons  - companies that derive a significant portion of revenue from nuclear weapons, land mines, cluster munitions, etc.

Gambling, adult entertainment, and thermal coal are the next largest group of exclusions. Morningstar noted that "in this time of climate awareness, more funds exclude thermal coal than exposure to the nuclear power sector."

There are a small but increasing number of choices for funds that invest in an environmental sector theme. Renewable energy and water-focused funds are the most prevalent, Morningstar said.

Morningstar also noted that the Australian industry is hampered by lack of portfolio holdings disclosure, which made it difficult for investors to know what their funds hold .

"The other things I'd add from the paper, if people want to invest sustainably, they're actively trying to avoid some sectors and have exposure to others," Kennaway said. "That brings to bear how terrible Australia's portfolio holdings disclosure is. "Australia is the last market of the 26 major markets that does not have regulated portfolio disclosure. It's an indictment for a country that wants to be a market leader that we do not have mandated portfolio holding disclosure."

Read more: Morningstar AustralasiaGrant KennawayJamie WickhamMichael JantziSustainalytics
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