The green screen

According to Morningstar data, sustainable funds collectively represented about US$3 trillion in assets worldwide as of Q2 2024 – an increase of US$1 trillion over the past three years. 

Given the substantial growth in the global market for ESG investments, it likely won’t surprise you that Australian investors are following suit. Indeed, as per Iress and Deloitte’s Advice in 2030: The Big Shift report, advisers engaged in offering investment products that manage climate risk are set to enjoy a 21% growth expectation across their business. 

It's clear, then, that ESG has a major role to play in the future of Australian investing – and the future of financial advice.  

What’s less clear is how advisers will navigate the complexities involved, including the rapidly-evolving regulatory landscape and sophisticated screening processes. There’s an increased cost associated with delivering these strategies – not to mention governance risk for advisers looking to effectively screen ESG criteria based on a given client’s ESG preferences. 

Depending on a client’s priorities, this screening process could require deep analysis across the entire value chain of an ESG investment strategy. Investors may seek transparency across the third-parties, subsidiaries, political affiliations and logistics services associated with the underlying investments in their portfolio. 

Solving all of this will likely require some form of automation; advisers may use generative AI, for example, as well as partnerships with data providers who can assist with reducing the complexity of the screening process. 

Then there’s the changing regulatory requirements stemming from Australia’s broader goal of achieving net zero by 2050. ASIC is taking an active role in this project, intervening where it’s determined companies are engaging in misleading statements and deceptive conduct relating to investment exclusions in ESG claims. 

Last month, ASIC deputy chair Sarah Court stressed the importance of making “accurate ESG claims to investors and potential investors” following the $11.3 million Mercer Super case. This illustrates the increasing importance of effective due diligence when screening ESG criteria. 

ASIC chair Joe Longo has also urged product providers and distributors to “start preparing now” for the mandatory climate reporting regime, which is being rolled out in phases. (The first phase began in July.) This will work in conjunction with a proposed labelling regime for financial products within the ethical sphere. 

These reforms are obviously aimed at creating greater confidence for retail investors looking to align their savings with their ESG priorities. Advisers have a critical role to play here, too, as they can “fill in the gaps” for individual clients in ways the broader regulatory framework isn’t equipped to accommodate. 

How they’ll do this remains an open question – one advisers will need to ponder carefully if they aim to capture the next-generation client opportunity.