CFS study confirms poor ESG understanding

Our new study reveals low comprehension of ESG terms amid expectation that demand for ESG-related funds will increase over the next five years. CFS is working with advisers to support client education efforts.

Despite being around as far back as the 1960s, the concept of environmental, social and governance (ESG) is confusing.

Several factors are contributing to the confusion: ESG covers a wide breadth of terms and buzzwords, it means different things to different people, and the lack of consistency in the labelling of investments.

New research commissioned by Colonial First State (CFS) has confirmed this is still the case in 2023.

A survey of 1,496 Australians has revealed less than a third (29%) of surveyed Australian consumers were aware of ESG or sustainable investing.

When prompted further, our study found only 6% were sure they understood it.

Almost half (48%) agreed that ESG or sustainability claims were confusing and almost two in three (58%) did not know how to compare different ESG options.

Our research also uncovered less than one in 10 (9%) of respondents were confident in their understanding of the differences between a ‘sustainable fund’ and an ‘impact fund’.

When it came to industry buzzwords, around half did not understand the terms ‘net-zero’ (50%) or ‘carbon offset’ (43%) and only 38% understood the term ‘greenwashing’.  

In a media interview, CFS Chief Investment Officer, Jonathan Armitage highlighted that “there is no real consistency around terminologies, methodologies and, to use a fancy word, taxonomies”.

“The lack of consistency and commonality around acronyms and descriptions around certain investment options and what they really mean are at the heart of why there is confusion and a lack of understanding about what specific investment options are trying to achieve,” he explained.

He expects the demand for ESG-related funds to increase over the next five years.

Supporting advisers with ESG discussions with clients

CFS is working with financial advisers to support them in their ESG discussions with clients and will be looking to provide them with dedicated tools. One such tool will be available on CFS Edge next year, which will enable clients to incorporate ESG factors into their investment decision-making.

We currently offer 15 sustainable funds available on the FirstChoice platform, including our own multi-manager sustainable growth fund, Thrive+.

Need for improved labelling for investment products

The Australian market currently has no defined criteria for the assessment of ESG factors and there are still some market-wide gaps of reliable ESG data.

Our research findings highlight the need for industry, regulators and government to continue to work together to develop consistent consumer labelling standards and improve consumer education to enable more informed decision-making.

CFS CEO of Superannuation, Kelly Power, highlighted that recognising consumers’ different objectives, values and preferences when it came to how they invest their retirement savings was crucial.

“In offering investment choice, we recognise the divergent views about what ESG means, particularly when it comes to investing. This confusion is not helped by the lack of consistent terminology and jargon,” she said.

The CFS study was conducted by market researcher Nature and surveyed 1,496 Australians aged 16 to 89 in July 2023 on their knowledge of sustainable investing. All respondents currently had either superannuation, investments, and/or a pension or annuity. The sample was nationally representative on age, gender and state.

You can read more about the ESG research findings here.

To help advisers and investors understand some common ESG and sustainable investing terminology, CFS has published a responsible investing glossary.