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The demand for ethical investment products has grown significantly in both Australia and New Zealand in recent years, with an increasing number of consumers in both countries now expecting their investments to minimise harm on people and the planet.

The Responsible Investment Benchmark Reports 2024 show the Australian responsible investment market has ballooned to A$1.6 trillion, which is 41% of assets under management, while the New Zealand market is NZ$207 billion, or 56% of assets under management. 

It is a trend that shows no signs of slowing down says Estelle Parker, co-CEO at Responsible Investment Association Australasia (RIAA). The organisation has developed the Responsible Returns website to guide finance professionals and investors who want to make decisions based on responsible and sustainable principles.

“Among New Zealanders, 57% say they would consider switching to a different provider if they found out their investments were in activities not consistent with their values and 65% of Australians would actually invest more if they knew that their investments made a positive impact in the world,” Parker says.

As more people seek ethical and responsible investment options, accountants and other finance professionals need to be able to help clients navigate potential challenges such as greenwashing, regulatory changes and reporting considerations.

What does ethical investment mean?

Given that different people have different ethics and values, what is considered ‘ethical investing’ can vary significantly. Essentially it means aligning investment choices with personal or societal values, aiming to generate both financial returns and a positive influence on the world, says Parker.

“To one person, it may mean avoiding animal abuse or fossil fuels. For someone else, it might mean intentionally investing in the energy transition and renewable energies or social housing,” she explains.

Regardless of the specific motivations, these values are closely reflected in the six Principles for Responsible Investment (PRI), a United Nations-supported international network of financial institutions, according to Kar Mei Tang, PRI regional head of Oceania and Asia.

The six principles cover integrating sustainability issues, being active owners, seeking appropriate disclosures, promoting the principles, collaborating with stakeholders and reporting on progress.

“There is a real opportunity for accountants to educate people, because many investors are not well informed about responsible investment and there’s a lack of accessible information through their usual channels,” says Tang.

The overarching message she wants accountants to understand is that considering broader non-financial factors in investment decisions is a positive factor for long-term returns. 

“Overwhelmingly, the research has shown this approach to be true when you’re factoring in risk-adjusted returns and long-term risks,” she says. “However, investment mandates still often are seen as prioritising financial returns and sometimes that’s interpreted to the exclusion of all other non-financial factors, even though they may carry significant risks and opportunities for future returns.”

Screening techniques

As trusted advisers, accountants need to understand the client’s specific preferences to help guide them to the investments that best meet their requirements says Erica Hall, director of strategy and distribution at U Ethical, Australia’s first not-for-profit ethical fund manager.

“There is nuance in how ethical investment is implemented,” says Hall. “Investors may have different priorities and thresholds for what they consider acceptable, and it is important to find out what they are before implementing a strategy.”

Excluding companies that are exposed to certain sectors is one approach, but the risk is that too many exclusions may lead to significant sector biases and tracking error which could compromise diversification, she argues.

‘While it’s fine to apply some exclusions, it’s important not to overdo it,” she says.

“Common exclusions include tobacco, weapons and fossil fuels. From there, you make trade-offs. For example, we set a materiality threshold for certain concerns – if a company has a minimal exposure to certain issues we might allow it, but we avoid larger exposures.”

Being proactive about advising clients on ethical investing and understanding what their values are can also lead to stronger, more lasting relationships, says Hall.

“Clients appreciate that their investments align with their values, not just financial performance. If you actually understand what matters to them and match the portfolio to those values, it’s a very good way to be competitive.

“We know investors care about performance, but they also care about how that profit is generated, so if you can show clients they have access to funds that take ethical values seriously, both in investment decisions and through active stewardship, then you’re well on your way to earning their trust and keeping them happy,” she says.

Reporting requirements

There are various challenges to be aware of when determining whether an investment meets the ethical threshold including greenwashing, where companies overstate their sustainability efforts. A lack of standardised data and reporting requirements are also issues to be aware of.

Both Australia and New Zealand now have mandatory climate-related financial disclosures to improve transparency and comparability for investors. Advocates are also pushing for broader sustainability-related disclosure requirements, such as nature and social inclusion reporting.

“Accountants can help their clients in terms of reporting assistance to meet evolving reporting requirements and improve transparency. Climate reporting is certainly something that needs to be on every business and investor’s radar with the rollout of sustainability standards S1 and S2,” says Tang. 

In addition, while there is no mandatory product labelling regulatory regime in either country, RIAA is working to reduce instances of greenwashing in the market through a certification process. The robust process examines factors such as investment decision-making processes, portfolio holdings and corporate engagement, says Parker.

“We do a very deep dive into all the products we certify at RIAA,” she says. “Around 70% of those that come to us seeking certification are required to make some changes, mostly around the language they use on the products and in disclosure statements.”

Mandatory disclosure of portfolio holdings is another area that could be improved, she says. In New Zealand, managed funds are required to disclose their full portfolio holdings every six months, but Australia is lagging.

“We've got a requirement for super funds in Australia to report their portfolio holdings, but not the underlying funds,” she says. “Transparency is so important and, as we continue to push for clearer standards and disclosure, we’re empowering both investors and businesses to make informed, ethical choices that drive real change.”

Take aways

• Visit the CA Library to read the ebook, Top Stocks: A Sharebuyer's Guide to ESG for Leading Australian Companies, by Erica Hall.
• Access Responsible Investment Association Australasia fact sheets and guides here.