The evolution of technology, the availability of more specialised investment options and the increasing impact of environmental and social issues - such as the devastating Black Summer bushfires - has brought investing with purpose into focus.

Millennial investors are often leading the way, seeking portfolios that deliver positive returns and support social change.

Australians are experiencing a seismic shift of attitudes towards investing. That's the view of John McMurdo, CEO of Australian Ethical, who says that 70-80% of Australians don't want their money to harm the planet - figures that just two years ago were closer to 10-15%, according to their research.

While McMurdo says the bushfires of 2019/2020 drove home to Australians "the vulnerability of the planet", he adds that "millennials have been ahead of the curve when it comes to ESG [environmental, social and governance] investing".

Matt Heine, joint managing director of Netwealth, agrees that the bushfires of two years ago triggered a major shift in the mindset of many investors.

"The bushfires made it difficult to ignore the impact of climate change," Heine says. "After the fires, we received a significant number of enquiries from investors wanting to bring ESG elements into their portfolio. At the same time, investors are increasingly asking their advisers to ensure their portfolio has an ESG overlay or ESG component."

From niche to broad appeal

Once a niche area, ESG investing has become mainstream. The latest report from the Responsible Investment Association Australasia (RIAA) shows that responsible investing is gaining mass-market appeal.

Money invested in funds with a responsible focus jumped 17% in 2019, to reach $1.149 billion according to the RIAA.

According to Heine, "In historical terms, ESG investing used to be quite specific to millennials. Today it appeals more broadly as investors realise they may not have to sacrifice returns to have ESG considerations in their portfolio."

McMurdo agrees: "The myth has been busted around performance. There is so much evidence around the superior performance of ethical investments."

The RIAA report confirmed this, noting 10-year returns averaged 9% annually on responsible Australian share funds - above the market average of 7.8% annually. As McMurdo says, "People are realising that you can put your money in an investment that does well, while also doing good for the planet. Why wouldn't you take that opportunity?"

Recognising 'greenwashing'

Despite the upsides, ESG investing is not without challenges. One of the key hurdles is knowing whether an investment has been greenwashed - in other words, made to sound more eco-friendly than it really is.

According to Kate Temby, non-executive director of Netwealth and partner at Affirmative Investment Management, a company that specialises in the impact bond market, greenwashing is an area where the value of a professional investment manager can shine through.

"It can be difficult for individual investors to uncover greenwashing," she says. "However, professional managers have the skills and resources to verify ESG credentials. It's like peeling back the layers of an onion to see if behaviours are consistent with ESG principles."

Exclusion gives way to opportunity

In the past, ESG investing often focused on excluding activities regarded as bad for the planet or having poor social outcomes. The RIAA study found that among consumers the most important exclusions are fossil fuels, human rights abuses, and armaments.

But Temby says that responsible investing should also be about embracing new opportunities to improve the world. "Investors can get caught up in exclusions, but there can also be opportunities as we transition the economy. It's important to see where new companies and new technologies offer possibilities for out-sized returns."

Betashares CEO Alex Vynokur has seen particular interest in ESG options through ETFs.

"While interest in ethical investing has increased across the board, socially responsible ETFs are in particularly high demand among younger investors," Vynokur says.

As millennials show an appetite for these markets, Vynokur maintains it's important that the market adapts to meet their needs. For example, the company has recently launched an ETF that gives exposure to global companies fighting for climate change.