Firms with thoughtful, well-articulated ESG policies are more likely to anticipate shifts in consumer preferences, regulatory expectations, and reputational pressures.

Tony Adams, Head of Sustainable Investment Research at Lonsec Research and Ratings, explores the evolving ESG practices of fund managers, with a particular focus on firm-level assessments. Adams reflects on developments observed between 2023 and 2025, noting both progress and emerging challenges in how asset managers approach Environmental, Social and Governance (ESG) integration.

The commentary outlines improvements in internal ESG scores across firms, driven by stronger policy frameworks, clearer reporting, and enhanced stewardship practices. Increased transparency, including more frequent and detailed disclosures, has contributed to a more standardised understanding of ESG expectations. Many managers now publish narrative-rich reports and case studies that illustrate how ESG considerations influence corporate behaviour, with quarterly stewardship updates becoming more common.

​​​​​”ESG is now treated as a core aspect of investment communication, enhancing transparency and investor confidence. Regular reporting also allows firms to reflect emerging ESG issues in near real time and to communicate progress more dynamically.”

Adams also indicates that while proxy voting disclosures have improved, gaps remain in the depth of explanation provided, particularly when third-party advisors are involved. This can affect investor confidence in the authenticity of stewardship efforts.

“While outsourcing provides consistency, it can reduce transparency in ESG-sensitive or controversial proposals and erode client confidence in the authenticity of stewardship.”

The piece highlights a shift in how ESG is framed within firms. While commitment remains strong, there has been a move toward more generic policy statements and a reduced emphasis on detailed integration processes. ESG is increasingly positioned as a risk management tool, with less focus on its potential to drive investment opportunity or differentiation. This trend may lead to inconsistencies in ESG application across asset classes and styles.

Despite these challenges, Adams suggests that overall ESG maturity is increasing. Enhanced transparency and stewardship practices are helping investors better assess how ESG risks and opportunities are managed. Clearer reporting supports accountability and may reduce the risk of greenwashing, particularly in the face of heightened regulatory scrutiny.

Adams concludes by noting that strong ESG stewardship practices can contribute to long-term value creation and serve as indicators of broader investment competence.

“Firms with thoughtful, well-articulated ESG policies are more likely to anticipate shifts in consumer preferences, regulatory expectations, and reputational pressures.”

As ESG expectations evolve, managers with transparent and consistently applied strategies may be better positioned to maintain investor trust and meet regulatory requirements.

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Mike has over 25 years’ experience in leading businesses and teams within Financial Services and joined from Xplore Wealth Ltd, where he was CEO and successfully led the friendly takeover to Hub24, a leading independent investment platform.

Mike has set himself an ambitious challenge for his first 100 days with the business, meeting with all 100+ employees, key partners and clients and says, ‘At a time when the financial services industry is going through so much change, it is incredibly exciting and reassuring to join a company like Lonsec that is so committed to supporting Advisers and Funds through industry changes.’

Mike joins at a dynamic time for Lonsec, with the Lonsec Managed Accounts hitting $2bn funds under management in July 2021 (up from $1bn FUM in October 2020), as well as being fittingly placed to support Advisers and their clients focus on sustainable and ethical investment strategies.

Lonsec has been at the forefront of supporting increased investor appetite for sustainable and ethical investments that also provide a solid return. In response, they developed the Lonsec Sustainable Managed Accounts to provide greater choice for clients seeking investment strategies that align with their personal values and demonstrate strong environmental, social and governance (ESG) practices.

Unique in the market, Lonsec Sustainable Managed Accounts combines both ESG, which focus on the underlying manager’s process to ESG factors and Sustainability measures, which focuses on the funds positive impact on the world.

The Lonsec Sustainable Managed Accounts have just been added to the Macquarie Wrap Platform and are also available on Hub24 and Netwealth.

Lonsec is also fulfilling its thought leadership mandate by launching a Sustainability program to continue to educate investors. Lonsec’s Head of Sustainability, Tony Adams says ‘With the Lonsec Sustainability program, we want to help financial advisers and their clients take a sustainable approach to investing by sharing insights and research powered by Lonsec and a range of industry leaders.’ Via webinars and articles, the Lonsec Sustainability program has recently covered subjects such as ‘greenwashing’ and how Advisers can start sustainable investing conversations with their clients. This is a partner program to the long running Lonsec Retire program, now in its ninth year.

Kevin Brennan is excited to be joining Lonsec as Chief Information Officer. Kevin brings more than 20 years’ experience running large technology teams in the wealth industry. His key focus will be to elevate the role of technology within Lonsec and drive a comprehensive technology and data strategy to transform its service architecture and further accelerate business growth.

Mike concludes, ‘We are so fortunate to be in a strong position to continue to honourably help Advisers, Managers and investors with insights and solutions to help them navigate the immense challenges that many of them face and share in common.’

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Leading investment research house Lonsec said that investors relying on pure ESG product scores or labels risk being misled about the true sustainability of the product’s underlying investments.

According to Lonsec analysis, funds that score well on a pure ESG basis do not necessarily score well based on sustainability measures that consider the specific industries and activities the fund is exposed to.

“The traditional ESG approach tends to be more about process and less about outcomes,” said Tony Adams, Lonsec’s Head of Sustainable Investment Research.

“ESG fund managers tend to look at sustainability factors in terms of the risks they pose to a company’s business model. Academic research supports the assertion that companies that follow strong ESG standards are more likely to outperform those that don’t.”

Adams said that while ESG analysis is an important element of a fund manager’s investment approach, it can create confusion for investors looking for investment products that explicitly align with their values.

“In some cases, you can end up with a portfolio that looks very similar to the broader market when it comes to exposure to things like fossil fuels, gambling, tobacco, or deforestation. For many investors, ESG integration might sound good, but in practice it will often fail to meet their expectations.”

Lonsec analysis highlights gap between ESG and sustainability

Data from Lonsec show that 19% of Australian equity managers rated by Lonsec score highly for ESG awareness but score poorly for sustainability. Likewise, 18% of managers fare relatively poorly in ESG awareness, but end up performing well in terms of the sustainability of the fund’s underlying investments.

Lonsec’s analysis covers 159 Australian equity funds, which are scored separately based on their ESG integration and the underlying ‘goodness’ of their portfolio.

Lonsec’s ESG score is based on the policy and reporting framework of each manager, and how deeply integrated its ESG process is with their investment decision making.

In contrast, Lonsec’s Sustainability Score looks through to the fund’s underlying investments and assesses how well they align with the United Nation’s Sustainable Development Goals (SDGs), as well as how much exposure the fund has—directly and indirectly—to ten controversial industries.

“Most investors, if you asked them, would assume there was a strong correlation between ESG and sustainability,” said Adams.

“That there is such a significant discrepancy demonstrates that we need better communication and better tools to help investors make informed decisions about where they put their money.”

ESG funds must ensure they meet investors’ expectations
If ESG funds wish to be viewed as sustainable, they need to be transparent about the composition of their portfolio and the size of their exposure to unsustainable industries.

“Whether it’s a company or a managed fund, what the investor really wants to know is: what industries and activities am I ultimately investing in and supporting?” said Adams.

“While investors care about a manager’s investment process they are often more concerned about the impact their investment has on society, the planet, and future generations.”

Lonsec’s Sustainability Score helps funds become more transparent by giving financial advisers and end-investors the information they need to build a genuine values-based portfolio.

For fund managers who agree to have their fund scored, Lonsec provides a Sustainability Report detailing the relative success of the fund in supporting the SDGs and minimising exposure to controversial industries. Lonsec’s sustainability research assesses the exposures of individual companies across the entire supply chain, allowing individual investors to make their own decisions about how and where to invest.

Finally, Lonsec’s Sustainability Score reflects the net impact of these measures, which is peer ranked and results in a score between 1 and 5 bees.

“We chose bees to represent our Sustainability Score because bees are a symbolic reminder of the importance of biodiversity in maintaining the health of the planet,” said Adams.

“When advisers and investors see 5 bees next to a fund’s name, we want them to associate that fund with the most sustainable investment outcomes in the market.”

Sustainability issues not always black and white
Sustainable investing is about balance. Avoiding every company with a positive carbon footprint is not necessarily good for our portfolios or humanity. The purpose of Lonsec’s sustainability research is to create transparency so investors can make informed decisions.

“We can all identify contentious activities, but whether or not to exclude them completely from our portfolio is a different matter,” said Adams.

“For example, a company like Woolworths is primarily involved in food production and distribution, but it also sells alcohol and tobacco products. Investors will have different views, but we can make sure they know which businesses are exposed to which industries, and how big their exposure is.”

Lonsec’s Sustainability Score exposes the truth about a fund manager’s holdings, helping investors build better portfolios without an ESG black box. As advisers and investors become more educated on the differences between sustainable investing methodologies, fund managers will need to take the lead on transparency and an honest conversation or be left behind.

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Lonsec will continue to assess fund managers’ processes against the principles of Responsible Investing as part of its investment rating, however will also introduce a new rating to go beyond Environmental, Social and Governance (ESG) labels by analysing the underlying products and services provided by the companies in their portfolio and their compatibility with the United Nation’s 17 Sustainable Development Goals (SDGs).

Lonsec said this will help financial advisers select genuinely sustainable products that are aligned with their clients’ values.

“There’s a growing desire among advice clients for investment solutions that don’t just take ESG factors into account, but put their money where their mouth is and actively consider the broader social and environmental impacts of the holdings in their portfolios,” said Lonsec CEO Charlie Haynes.

“Part of the challenge is giving advisers and their clients access to the right information. At the moment there’s a real lack of transparency that makes it difficult for investors to understand exactly what they’re investing in.”

According to Lonsec, while ESG investing has entered the mainstream, it doesn’t always result in outcomes that clients expect. Traditional ESG incorporates these factors into the investment process, but it doesn’t necessarily exclude unsustainable activities – or favour sustainable ones. Most approaches allow the investment into ‘unsustainable’ companies if the ‘price is right’ or corporate engagement is deemed to be positive. This does not necessarily align with investor expectations.

“Lonsec is a strong advocate of incorporating ESG into the investment process, but given the broad range of ESG approaches used by managers, it’s important that investors are aware of what it means for their own portfolio,” said Tony Adams, Lonsec’s Head of Sustainable Investment Research.

“The risk of ESG investing is that it can result in a ‘greenwashing’ of portfolios. Investors might see an ESG label and assume that it’s only investing in sustainable activities, but this is almost certainly not the case. You have to dig deeper to understand how the investment manager defines ESG, how they use it in their investment process, and how it impacts the final portfolio outcomes.”

Lonsec’s new sustainability ratings and reports will be made available through its award-winning iRate platform, allowing advisers to understand how their investment decisions line up against the UN’s 17 SDGs, while demonstrating to their clients how their advice fits with their values and preferences.

“We’re excited to be able to offer this new capability in partnership with Sustainable Platform,” said Mr Haynes.

“Our iRate platform is more than just research. It gives users the tools to create tailored portfolios based on a range of qualitative criteria that now includes the proper delineation between responsible investment managers and sustainable investments.”

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