Here’s why companies need to become more ethical

ESG investing is one of the biggest trends in financial history: Expert

Investors and consumers are making more decisions based on ethical considerations and companies will have to change their behavior to catch up with them, an expert warns.

In a recent, high-profile example, Norway's $900 billion sovereign wealth fund last week decided to exclude U.S. utilities company Duke Energy from its fund over concerns about environmental damage.

Similarly, the Fossil Free movement has had some success in pressuring public and private institutions around the world to divest from fossil fuel companies.

In July, the campaign helped to convince the city of Stuttgart in Germany to introduce new guidelines on ethical investing, which will see it divest public money from 75 European companies engaged in coal, oil, gas and fracking.

Customers purchase Anya Hindmarch's 'I'm Not A Plastic Bag' from the Sainsbury's store in Camden on April 25, 2007 in London.
Gareth Cattermole | Getty Images Entertainment | Getty Images

Investment strategies based on these sorts of environmental, social and governance (ESG) factors is one of the biggest trends to hit the financial industry in decades, says Andreas Feiner, founding partner of asset management firm Arabesque, which invests according to strict ESG criteria.

"What we see is actually that companies that we exclude from our investment process on average underperform the benchmark," he told CNBC's Squawk Box Europe.

According to Feiner, Arabesque is able to outperform its benchmark by excluding these companies, which tend to have higher risk.

"We look into what are the best companies in terms of ESG in an industry and we only exclude the worst within an industry," he added.

Rather than being a niche investment strategy, ESG investing is attracting more and more attention, Feiner added.

"Just yesterday, we had a meeting with a consultant who said the demand for ESG searches on their database has increased six-fold over the last two years," he said.

Similar changes are taking place in the consumer space, according to the white paper "Eco Worriers: Global Green Behaviour and Market Impact" published by market researchers Euromonitor.

A survey by the company found 64 percent of consumers claimed they try to have a positive impact on the environment on an everyday basis and 53 percent said buying green or environmentally friendly products were an important factor in purchasing decisions.

"Green features will become standard in many markets, as environmentally friendly products move out of the premium niche and even deeper into the mainstream," the report said.

In addition, consumers will increasingly use social media to check and share information about a company and its green credentials, the report forecasts.

"Combined with a tighter regulatory and competitive environment, this means companies have little choice but to be authentic in their environmental positioning."