The biggest priority for finance and investment managers has traditionally been ensuring the best return for their clients and investors. But as our world faces many significant environmental and social problems, Associate Professor Jacquelyn Humphrey says it’s become increasingly important for finance managers to prioritise other considerations.
One of the biggest of these is sustainable investment strategies and sustainable finance, also known as ESG (Environment, Social and Governance).
As a teacher of UQ’s Master of Finance and Investment Management program, Jacquelyn says to address emerging global challenges, huge amounts of capital needs to be invested and funnelled towards them. This provides an enormous opportunity for financial managers to help solve some of the world’s greatest challenges.
"The United Nations Environment Programme (UNEP) estimates $8.1 trillion US is needed to invest in nature-based solutions over the next 25 years. Current annual investments would meet less than a third of this.”
As a result, Jacquelyn says it's no longer the case that ESG considerations can sit to the side. ESG needs to be thoroughly embedded across all aspects of the supply chain, management and operations. Finance is needed to make this happen. This presents an important learning opportunity for those working in the financial management industry and those hoping to break into the field.
So, what is ESG and how is it relevant to sustainable finance and investing?
Put simply, ESG relates to the consideration of environmental, social and governance issues when making decisions. This includes finance and investment decisions. However, ESG is anything but simple.
The 3 components of ESG and how they relate to finance and investing are:
Environment
Human life, businesses and industry all rely on the natural environment. The UNEP reports that just under half of Australia’s GDP, and three quarters of our export earnings, comes from sectors that directly depend on nature. But addressing pressing environmental issues like nature repair, carbon emissions reductions, renewable energy and water use requires finance.
Social
Businesses and organisations operate within society. This means that businesses can change social outcomes in positive or negative ways. Society can also impact businesses, by allowing them to operate or by hindering business activities if it’s perceived that they’re hurting the society. Examples of this include damaging media reports, protests, boycotts, lawsuits.
Businesses therefore need to consider how their day-to-day operations impact on the societies in which they operate. For investors, this means investing in businesses that have positive social impacts. These businesses may be less risky as they are less likely to face negative backlash from society.
Social issues that are relevant for businesses and, therefore, for investors include:
- First Nations and other human rights
- gender equality and income inequality
- child labour and modern slavery
- education and literacy
- food security and poverty
- fair trade and ethical sourcing.
Governance
The Australian Securities and Investments Commission (ASIC) definition of corporate governance includes relationships between stakeholders, frameworks, decision making and responsibility. Governance could include considerations like board composition, size and structure, risk management policies and practices, or accountability issues.
As investors, good corporate governance is vital. It ensures the companies we invest in are well-run and manage risks appropriately.
Is sustainable finance the same as ESG?
The terminology in this area has changed over time and is sometimes a little slippery. Historically, terms like ethical, responsible or socially responsible were used but today the terms ESG or sustainable are more common. The 2 terms do tend to be used interchangeably.
3 reasons you should value sustainable finance and investment
Even if you’re not interested in solving the world's problems, ESG is still relevant to anyone working in finance. Here are 3 reasons why.
1. Risk mitigation
Risk management is a significant part of any finance or investment manager’s job. Many ESG risks are systematic risks – for example, we cannot diversify away climate change. Climate change is a systematic risk. This means that all our investment portfolios will be exposed to climate change to some extent. And that means climate change is a risk all investment managers need to consider and manage effectively.
2. Regulation
To date, particularly in Australia, ESG regulation has mainly been voluntary. However, the landscape is changing significantly. Treasury recently released Australia's Sustainable Finance Strategy for consultation. This ambitious strategy includes:
- mandatory climate disclosure for large, listed companies from 2025
- the development of a sustainable finance taxonomy
- climate transition planning and target setting
- sustainability labelling for investment products.
3. Consumer demand
Australians want their financial and investment products to incorporate ESG considerations. A 2024 survey by the Responsible Investment Association of Australasia found:
- 75% of Australians say social issues are important when thinking about investing their money.
- 76% want their super fund management or their bank to make a formal commitment to achieving net zero emissions by 2050.
- 52% of Australians expect their financial advisors to be knowledgeable about responsible investment.
Expand your capabilities with the Master of Finance and Investment Management
Do you want to learn how to consider ESG concepts in your financial decisions and investment portfolios? Do you want to future-proof your career by developing in-demand advanced specialist finance and investment management skills?
The Australian finance industry is evolving at a fast pace. Innovations including new payment technologies, digitalisation, cyber security risks and the global reach of geo-political events require the industry to adapt and change. Other evolving factors that require skilled financial management include Australia's ageing population, rising public debt and house price growth.
Recognising the need for financial professionals equipped to successfully navigate the evolving financial landscape, we've developed the Master of Finance and Investment Management. Co-designed with industry, this program will help you develop the in-demand capabilities to advance the finance profession.
The Master of Finance and Investment Management covers topics like sustainable finance, sustainable investment, FinTech, analytics, and financial modelling. As a student, you’ll be on top of the latest Australian industry developments. You'll also learn different ESG strategies and hear how other professionals are implementing sustainable investment strategies across their portfolios.
Explore where the Master of Finance and Investment Management could lead your career.
