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.

 

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

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

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.