The theme for Earth Day 2023 is ‘Invest in Our Planet’. Given that, we’re looking at sustainable and ethical investment, one of the world’s fastest growing investment trends.
Earth Day is the world’s largest environmental movement, with thousands of events worldwide. This year’s Earth Day theme is a prompt to invest time and energy into finding out about what’s happening to our environment, and doing more to help find a solution.
But taken literally it hints at one of the world’s most promising investment trends, toward sustainable, ethical investment (sometimes called ESG investment).
The ESG investment boom
Sustainable, ethical, or ESG investment is growing rapidly. In fact, Bloomberg Intelligence expect that total funds invested in sustainable investments will increase from $35 trillion to $50 trillion from 2022 to 2025.
These investments focus on more than just achieving a financial return. The idea is that they also focus on non-financial metrics, such as a business' effect on the environment, people and communities. This enables people and institutions to invest in companies that align with their values and are making an effort to operate sustainably.
Institutional investors such as pension funds and insurance companies are already pouring their money into ESG investments. Research from PwC found that three quarters of these large investors intended to stop investing in conventional funds in favour of ESG ones in 2022.
This massive growth has been driven both by changing government policies all over the world and an increase in consumer demand driven by environmental concerns.
How do ESG funds work?
There is no clear standard for an investment to qualify as sustainable or ESG and every fund is different. ESG index or managed funds have a few different methods that they use:
When you see an ESG label on an investment, it’s important to read the product disclosure statement so that you fully understand how its ESG component actually works.
- Some negatively screen or exclude companies that engage in harmful practices. This might include weapons, tobacco, animal testing, corruption or labour rights violations.
- Others positively screen. Rather than excluding investments for harmful actions they’ll include investments for positive actions like developing new green-energy technology.
- Some will even include an ESG score for every company in the fund then weight their investment towards companies with higher scores.
- Some funds also consider ESG risks such as climate change or community harm when making decisions.
Exploring ESG funds in NZ
There are hundreds of ESG investments available to retail investors in New Zealand. That includes:
- ESG KiwiSaver funds and indexes
- Direct investment in ESG companies and index funds that consider ESG factors through online platforms
- Ethically managed funds in equities, property and bonds through providers who adopt an ESG-centric approach.
If you’re keen to put your investment funds towards businesses that are making an effort on sustainability and ESG, but you’re not sure where to start, it’s a great idea to talk to a financial adviser.
Alternatively, if you’d like to check on what your KiwiSaver, indexes or managed funds are invested in visit the Mindful Money website. This charity makes it easy to find investments that align with your values and evaluate your current investments through an ESG lens.
Watch our Money and You episode with Mindful Money’s CEO Barry Coates here: https://www.moneyandyou.org.nz/blog/how-to-use-your-money-for-good
This information is general information only. The views and opinions expressed in this video are those of the speakers and do not necessarily reflect those of the FSC. It is not intended to constitute financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted financial adviser or other professional advice.
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3 September 2021.