In response to a growing cost-of-living crisis, Australians are altering their investment focus, prioritising immediate financial stability and long-term wealth over Environmental, Social, and Governance (ESG) considerations. This shift highlights a noticeable gap between the Australian government's sustainable finance push, as outlined in the Sustainable Finance Strategy Consultation paper, and the sentiments of consumers and financial advisers amid economic uncertainties.

A recent Adviser Ratings survey of 2,100 Australians revealed that only 38% are currently incorporating ESG factors into their investment decisions. This statistic underscores a broader sentiment change, with consumers increasingly valuing financial stability and long-term wealth protection in the face of the ongoing cost-of-living crisis, relegating ESG factors to a secondary position.

Further emphasising this shift, advice practice leaders across the country reported a substantial decline in client inquiries about ESG investments. The decrease from 45% of clients inquiring about ESG-focused opportunities last year to 33% this year indicates a tangible reprioritisation among investors, influenced by heightened economic uncertainty.

Chris Carlin, Senior Financial Advisor at Vista Financial Group, shared his perspective, stating, “Everyone wants to invest in ESG until they hear that the fees are higher and/or ESG funds are underperforming. Unfortunately, there will always be times when ESG either overperforms or underperforms over a certain period. What needs to be the primary focus is your personal beliefs, preferences, and the companies you want to support.”

The lack of a clear and unified understanding of ESG investing further complicates the issue, with consumers and advisers expressing confusion about the practical implications of ESG in investment strategies. This lack of clarity adds to the growing challenge faced by the industry in aligning sustainable finance initiatives with the immediate financial concerns and understanding of consumers.

While the Australian government continues to advocate for sustainable finance and ESG investing, the industry grapples with bridging the gap between these initiatives and the immediate financial concerns of consumers. Balancing the push for sustainable investment with current economic realities and enhancing investor education on ESG principles becomes a pivotal challenge for the industry.

Chris Carlin continues, "As of October 2023, Vanguard Ethically Conscious Australian Shares ETF (VETH) had incurred a loss of -0.96% over one year but is up 5.86% over three years. In comparison, the Vanguard Australian Shares Index ETF is up +2.40% over one year and +8.68% over three years. This marks a significant reversal from 2015 to 2020, where ESG funds generally outperformed non-ESG funds, primarily due to their overexposure to the technology sector."

In parallel, "green" managed funds are experiencing a setback in the investment markets, with a 78% drop in inflows during the first three months of the year. This decline follows their poor performance last year, with oil and coal stocks outperforming and "clean" tech stocks facing significant sell-offs.

Criticism of soft labelling regulations in the ESG sector and a backlash against ESG investing in some US states, including moves to ban state assets from enacting ESG strategies, contribute to the diminishing interest in sustainable funds. Notably, US money managers closed more ESG funds than they opened for the first time, indicating a notable shift in sentiment.

The evolving landscape of ESG investing prompts questions about the future trajectory of sustainable funds and their impact on corporate diversity and inclusion. As businesses navigate cultural debates surrounding ESG issues, the financial world grapples with a broader dilemma, pondering how these dynamics will shape the future of investments and corporate strategies.