Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 231

The ethical investing trend and a Kiwi lesson

The expectations that Australians place on the financial services industry are changing fast and traditional ways of managing and advising on investments need to evolve to keep up with these changes. More clients are asking for a responsible and ethical approach to how their money is managed, from retail through to institutional investors.

The industry is responding. Today in Australia, nearly one in every two dollars is being invested with a commitment to responsible investing, taking into account environmental, social, governance (ESG), or ethical considerations into investment decision-making.

The drivers of the ethical investing trend

This proportion reflects a quadrupling over the past three years, largely driven by the growing acknowledgement within the industry that ESG factors contribute to valuations, both positive and negative. For example, earlier this year, Bank of America Merrill Lynch stated that ESG has become the most important signal of future risk and “a better signal of future earnings volatility than any other measure”.

But another driver has emerged which many in financial services have overlooked. Australians expect their investments are managed in a way that is consistent with what’s important in their own lives. They hold views on ‘what matters’ and what is ‘right’, as demonstrated by the charities they chose to donate to, the businesses they prefer to shop at and the type of world they feel they are contributing to for their children and grandchildren.

The Responsible Investment Association Australasia (RIAA) recently launched new consumer research underscoring this expectation, with 9 out of 10 Australians stating that they expect their superannuation and other investments to be invested responsibly and ethically.

Lessons from across the Tasman

We witnessed a resoundingly clear example of what this expectation means in practice in the New Zealand market last year when front page reports in the national broadsheet and radio networks exposed that the default pension funds (KiwiSaver funds) across the country were holding investments in tobacco, cluster munitions, land mines, and nuclear weapons. This resulted in a significant outcry by the community and politicians, followed by New Zealand police investigations. The majority of KiwiSaver providers dumped stocks across these most controversial industries within a matter of weeks in order to retain clients and hose down the reputational damage.

While only around 4% of Kiwis had opted in to ‘ethical’ funds, the vast majority of people expected their retirement savings to be invested, at a bare minimum, in ways that avoided the most harmful of industries. Within a few months, responsible investment assets under management moved from 4% to 60% of the industry with ‘ethical’ negative screenings in place. This is a cautionary tale for the Australian financial services industry, where portfolio holdings are much less transparent than KiwiSaver funds, but where the stated expectations of Australians are clear.

Notably, our research also showed that this expectation of responsible and ethical investment is supported by a willingness of Australians to switch funds. Four out of five surveyed stated they would consider switching their super or other investments to another provider if their current fund engaged in activities inconsistent with their own values. Some 24% indicated they are likely to consider investing in ethical funds in the next 12 months, and over 50% said they would consider it over the next one to five years.

The money is already moving, with a doubling of funds flowing into traditional ethical investments over the past two years, reaching $65 billion in AUM at the end of 2016. Indeed the fastest growing super fund in 2016 according to KPMG was Australian Ethical.

It’s no longer just our largest banks and listed companies that face the scrutiny of the public and elevated expectations of transparency. Insurance, banking, superannuation, financial advice and fund managers are being examined much more closely than ever before. It’s no longer sufficient to deliver strong returns. An army of small online funds, investing platforms, P2P lenders and boutiques are moving in to capitalise on this shift, and are already nibbling away at market share of the bigger institutions.

The three things to keep in mind

First, our biggest challenge in this industry has been to achieve deeper engagement with our client base. Responsible and ethical investing provides a means to connect more deeply with clients, around issues they care deeply about, and through this, build more loyal clients. If managers want clients to open their emails and letters, connect returns and distributions to a discussion about the issues the clients care about.

Second, our communications need to modernise and move into the digital age. Many of the new cohort are primarily based online, communicating online, signing up new clients online. It is much easier today to move between super funds, managed funds, and banks, and to attract new members through websites and apps.

Third, Millennials count, but data regarding the financial preferences of Australian Millennials has been scant on the ground. RIAA’s research dug deeper and confirmed the elevated propensity of Millennials to invest in line with their values: 88% are considering investing in ethical funds in the future or already doing it, compared with 65% of Baby Boomers and 73% of Gen X. Furthermore, 9 in 10 Millennials would change providers if they were engaged in activities that are not consistent with their values (compared with 68% of Baby Boomers and 77% of Gen X).

It’s time we reconsidered how we deliver on some of the core principles that underpin the finance industry – notions of best interests, fiduciary duties, and ‘know your clients’.

The ability to explore and align people’s values with their investments is what will distinguish the leaders in wealth management from their robo-competition over the coming decade.

 

Simon O’Connor is Chief Executive Officer of the Responsible Investment Association Australasia (RIAA).

As further evidence of the rising significance of ESG investing, The Sydney Morning Herald this week reported how big investors are warning major polluters to recognise implications of climate change.

 

  •   14 December 2017
  • 2
  •      
  •   
banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.