'A lot of headroom to grow': Is 2022 the year ASX investors turn to ESG shares?

The future looks bright for ESG investing in Australia.

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Key points

  • The amount of cash Australians invested in ESG equity funds more than quadrupled in 2021 to $3 billion
  • That means that $2 of every $10 placed in equity funds last year was invested into ESG strategies
  • That figure is expected to grow this year as economies reopen

Australians poured $3 billion into funds invested in environment, social, and governance (ESG) shares in 2021, indicating 2022 could see more ASX watchers turning to the 'ethical' side of investing.

Calastone ­– the network that processes 95% of Australian managed fund flows ­– found the amount of cash invested in ESG equity funds more than quadrupled last year, surging 338%. And it likely hasn't hit the ceiling yet.

Let's take a look at what this year could bring for the ESG investing movement.

Australian investors turn to funds focused on ESG shares

Talk of ASX-listed ESG shares has escalated in recent years. And that seems to be good news for ESG-focused equity funds.

Calastone has analysed more than 500,000 buy and sell orders every month since 2019. It found the tables turned for ASX ESG investing in 2021.

Last year, $2 of every $10 invested in funds by Australians was placed in ESG equity funds. That's despite such funds reporting cash outflows as recently as 2019.

Calastone managing director, head of Australia and New Zealand, Teresa Walker believes the amount of cash Aussies invest in funds focused on ESG shares could soon surpass what's being placed in traditional managed funds.

It's also speculated ESG funds could also eventually take capital from traditional funds.

"Inflows to ESG funds have grown exponentially, following trends we are seeing elsewhere in the world and we expect this to continue in 2022 as economies reopen," Walker said.

"The value of ESG funds under management is still dwarfed by traditional categories, so there is a lot of headroom to grow further."

That's not just good news for ESG fund managers. It's also a positive for Aussies looking to diversify their investments.

Generally, ESG funds don't simply stick to the ASX, instead buying 'ethical' shares from all over the world.

"In 2021, for example, three-fifths of ESG cash flowed into global ESG funds, compared to less than half the cash devoted to non-ESG equity funds," Walker said.

How do Aussies stack up against the world?

Aussie investors' excitement over ESG equity funds is dwarfed by their international peers.

In the United Kingdom, $8 of every $10 put into equity funds for the first time in 2021 was invested in ESG strategies.

In Europe, the amount of capital invested in traditional funds fell in 2021 as investments in ESG offerings doubled.

But Australia leads the world in one aspect. For every $10 put into fixed-income funds last year, $4 went to fixed income funds focused on ESG strategies.

Which ASX 200 shares are considered ESG investments?

Not all investors will be interested in putting their savings into equity funds.

Luckily there are plenty of ESG shares listed on the ASX.

While the factors that make an ASX share ESG are subjective, some of the leading holdings of the SPDR S&P/ASX 200 ESG EFT (ASX: E200) include:

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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