Performance fears deterring ESG investment

While Australians increasingly expect their investments to be ESG-aligned, Morningstar’s Voice of the Asset Owner Survey 2025 found that concerns on how this will impact returns have also grown.

According to research from the Responsible Investment Association Australasia (RIAA) in 2024, some 88 per cent of Australians expect their investments to be responsible and ethical, up from 83 per cent in 2022.

However, a new survey from Morningstar of some 500 asset owners across the Asia-Pacific region, North America, and Europe found that more than half of respondents (53 per cent) consider the impact on returns as a barrier to considering ESG factors in their investment process, up significantly from 38 per cent in 2022.

This is concerning as the idea of investment performance being negatively affected by an ESG choice has largely been declining in recent years. According to RIAA, performance concerns peaked at 70 per cent of investors in 2022, but have since fallen to 45 per cent. 

Morningstar respondents, which included family offices and outsourced CIOs, also worried about the lack of standardised data (44 per cent), reporting difficulties (33 per cent), and regulation (17 per cent), though this was down almost half since 2023, which reported 30 per cent.

While some were reluctant in the face of possible negative return impacts, around 20 per cent of respondents said investment performance was actually part of their rationale for considering ESG in the investment process.

Looking at those who considered regulation to be a hindrance, around three in five noted excessive bureaucracy and reporting requirements as a grievance, along with overly complex taxonomies and inconsistent taxonomies.

The most common barrier to ESG investing when it comes to regulation, however, was the lack of agreement on market standards or definitions, with around two-thirds of APAC respondents noting this as a barrier.

Terms, such as sustainability and responsible investment, were also commonly used by more than 50 per cent of respondents, signalling a potential lack of clarity when it comes to the ESG market.

Tackling this atmosphere of confusion in Australia, Treasurer Jim Chalmers and Assistant Treasurer Daniel Mulino put forward a consultation in July seeking feedback from investors and companies on sustainable investing and how funds in this category are labelled.

Chalmers said: “These labels will help investors and consumers identify, compare, and make informed decisions about sustainable investment products to understand what ‘sustainable’, ‘green’ or similar words mean when they’re applied to financial products.

“A more robust and clear product labelling framework will help investors and consumers invest in sustainable products with confidence and help tackle greenwashing.”

Speaking on the issue later that month, Dugald Higgins, head of responsible investment and real assets at Zenith Investment Partners, suggested that the personal nature of ethics, along with labels being used interchangeably, has led to considerable confusion regarding investment labels in this sector.

“ESG is merely looking at the external E, S and G factors that influence an investment’s value via financial materiality (either as a risk or an opportunity). Sustainability is the opposite; it’s looking at how an investment impacts the world around it (impact materiality),” Higgins told Money Management.

“While sustainable funds consider ESG, not all ESG funds consider sustainability. ESG is just a process, not an objective.”