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Why you should look into ESG investing ahead of COP26


On the eve of COP26, investors are seeking to align their money with their values.

The run-up to COP26 is seeing investors looking to invest ethically, as world leaders come together on climate talks.

At COP26, which is the 26th UN meeting to discuss climate action, Australia will bring forward its "technology not taxes" climate solution.

With our federal government's plan receiving mixed reviews, investors are seeking their own solutions to climate issues.

And according to industry experts, they could cash in on the transition.

Better returns for investors

When considering an environmental, social and governance (ESG) investment, an investor's motivation might be to align their morals with their money.

But, according to Nicolette Boele from Responsible Investment Association Australasia (RIAA), its executive policy and standards explains that ESG investing goes beyond this.

In fact, she notes investors could actually increase their returns through ESG investing.

"If you invest in an ESG fund, the fund is likely to do better over the long-term because the managers are taking into account environmental, social and governance risks when they are pricing the companies in the portfolio," Boele said.

"When they do that, they are investing in companies that are just better managed meaning investors get better returns in the long-run."

Impact on the world

Boele notes that there are 2 parts to ESG investing.

Firstly, she explains it's about managing risk and secondly, it will help progress the world faster.

Using the example of climate change ahead of COP26, Boele notes that ESG could be part of the solution to net-zero emissions.

"The other part of ESG is about seeking out the opportunities," she said.

"If [investors] are particularly interested in having direct shares or want to engage with their money, then by selecting funds or shares that seek out the opportunities, like energy efficiency, renewable energy, you're kind of voting with your money and backing solutions that are going to help us get to net-zero faster."

3 ways to ethically invest

Boele highlights 3 ways investors who want to get started in ESG investing can start their portfolio.

1. Use an online brokerage

"Let's say you're a young person and have a few thousand dollars. Of course, you can get an online brokerage account, go onto a site like Responsible Returns, get your shortlist on what's available to buy on an exchange, if you want an ETF," she said.

2. Search for certified ESG products

She notes for investors who potentially have more to invest, that they might want to go onto one of the investment platforms and search for certified ESG products. "Then you'll have a decent menu to choose from," she said.

3. Work with a financial advisor

"You might choose to get a financial advisor and one that is certified to give ethical and responsible advice. Boele said, "Those people can do some longer term financial planning with you, so that you tailor your package through your life stages."

For those looking to ESG invest through property instead, Finder has previously prepared some handy hints.

Institutions seek solutions

Individual investors are not alone, with the bigger end of town also looking to invest their money more ethically.

More than 730 institutions that represent more than $69 trillion in assets under management have signed a pledge.

They're calling for governments to end fossil fuel subsidies, phase out thermal coal power stations and mandate climate risk.

The investors argue that the right policies would unlock the trillions of dollars of investment.

It would also allow for the world to transition to net-zero faster.

"Our ability to properly allocate the trillions of dollars needed to support the net-zero transition is limited by the ambition gap between current government commitments (as set out in NDCs) and the emissions reductions needed to limit global average temperature rise to 1.5-degrees Celsius," the statement concludes.

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