Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 381

Four reasons ESG investing continues to grow

Interest in ESG (Environmental, Societal, Corporate Governance) investing continues to grow at a rapid pace, and there are no signs to indicate that this investment trend will decelerate. Since 2012, global investment in ESG-centred products has more than doubled to almost $31 trillion, up from $13.3 trillion in a mere eight years.

In Australia, the growth has been even more convincing. According to 2020 research published by the Responsible Investment Association of Australasia, responsible investing currently accounts for 44% of the $2.25 trillion professionally managed investment universe, up from 17% from five years ago.

Further, Australian investors are among the most ESG-aware in the world, with 86% of Australians expecting their super or other investments to be responsibly and ethically invested. An even higher percentage (89%) want their investments to be invested with social and/or environmental factors in mind.

Whether or not this investor sentiment is in response to global events or events here at home – who could forget the fiery images of the 2020 bushfires – the message is clear. 

But for anyone holding back from investing in a product with a specific ESG investment tilt because they have heard it may be more expensive, or that it can’t achieve diversification, here are four pointers towards why this investment trend continues to grow in popularity.

#1 – Not too niche for a core portfolio

It is still a commonly-held perception that ESG products are too niche and should only be used in the satellite portion of your portfolio. However, the increasing popularity of ESG investing has resulted in new and differentiated products. There is now greater choice and availability of broadly diversified ESG products that could be used as the core of any investment portfolio.

Not all ESG products are created equal. Investors should understand the underlying ESG approach. If a managed fund or ETF utilises exclusions – weapons manufacturers, vice and fossil fuels for instance – investors should look at what portion of the broad market has been excluded, and determine if that is a suitable exposure for the core of their portfolio.

#2 – ESG investing returns are comparable to broad market returns

ESG products do not reflect the entirety of the broad market, which can be a result of the exclusions or screens applied to the investment. Investors should also be aware that returns could vary from the broad market, whether that be underperformance or outperformance. For instance, ESG-screened products typically outperformed the broader market during the first half of 2020, due to the minimal exposure to oil and gas markets which were particularly volatile during the initial stages of the pandemic. However there is no telling if oil and gas markets will bounce back or whether this trend of outperformance will continue for the long run. Based on Vanguard’s research, an investor can generally expect similar returns with an ESG product over the long term to that of the broad market.

#3 – ESG can be both active and index

Vanguard is known for its index funds and strategies but we believe that active and index strategies can work hand-in-glove to deliver a broader, well diversified portfolio. ESG investing is not limited to an active investing strategy. You can choose to be an active investor by seeking alpha with an ESG filter applied. Or you could choose to invest in an ESG index fund which provides a broader exposure and diversification, that still reflects your values and beliefs.

Both options should be viewed in the context of ultimately building a broadly diversified, low-cost portfolio, that takes a long-term view.

#4 – Bonds can be sustainable investments too

If ethical considerations are important when building a well-diversified investment portfolio, why would you stop at the equity sleeve of a portfolio?

Companies issue both bonds and equity. It would be inconsistent to exclude an equity based on ethical considerations only then to invest in the same company through their debt or bonds. Investing in a bond fund that reflects an investor’s values can be as simple as it is on the equity side, particularly as the number of ESG bond funds continue to grow.

Similar to ESG equity funds, ESG bond funds may screen out companies that engage in activities that are on an exclusion list and investors can achieve an entire portfolio that represents their ethical values.

Of course, whether ESG the core or a part of an overall portfolio, investing should always consider long-term goals, risk appetite and fees. The good news for investors who want their portfolio to reflect their values is, the more popular ESG becomes, the more choice that is available, leading to lower costs, investors feeling good and with the potential for strong performance.

 

Rachel White is Senior Manager, Product Strategy at Vanguard Australia, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For more articles and papers from Vanguard Investments Australia, please click here.

 

  •   28 October 2020
  • 1
  •      
  •   

RELATED ARTICLES

Sustainable, responsible or ethical – what’s the difference?

Beyond the acronym, navigating important ESG choices

Elevating responsible investing to solve real world challenges

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 639

Thank you for the hundreds of responses to our Reader Survey and to maximise the sample size, we’re leaving it open until this Sunday. Here is an overview of the results so far.

  • 27 November 2025
  • 1
Investment strategies

Where to hide in the ‘everything bubble’

It might not be quite an ‘everything bubble’ but there’s froth in many assets, not just US stocks, right now. It might be time to stress test your portfolio and consider assets that could offer you shelter if trouble is coming.

Investment strategies

The ultimate investing hack: dividend growth stocks

Investors often fall prey to ‘amygdala hijacks,’ letting emotion trump reason. By focusing on dividend-growth with stocks instead of volatile prices, you can steady your mindset and let compounding do the work. 

Investment strategies

CBA or global banks?

CBA’s recent pullback highlights single-stock risk. Global banks trade at lower P/Es with rising earnings and dividends, offering investors both income potential and long-term value beyond the local market.

Investment strategies

Global dividends rising, but Australia lags

Global dividend growth surged in the third quarter, with median growth of almost 6%. Australia was a notable exception as dividends fell, thanks to flagging mining company payouts.

Economy

I called inflation's rise and fall and here's what's next

In 2020, I warned that surging US money supply growth would spark inflation. By early 2023, I said US money supply was dropping dramatically and that meant inflation would decline. Here's what happens next.

Superannuation

Are excessive super funds giving Australia “Dutch Disease”?

The irony is profound: a system designed to secure Australians’ futures may be systematically dismantling the economic diversity necessary for long-term prosperity.

Investment strategies

Could your children pass the inheritance ‘stress test’?

You devote years of your life working, saving and investing, striving to build a legacy that will outlive you. Before any wealth moves to the next generation, here are six questions every parent should ask themselves.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.