ESG is here to stay

20 Sep 2021

Investment Marketing Analyst, Jon Lockyer, looks to dispel the perception that Environmental, Social and Governance (ESG) investing is a passing trend.

 

2020 proved to be the watershed moment for responsible investing and ESG across the globe. The Coronavirus pandemic forced us to take pause from the traditional fast pace life we have come to accept, and consequently reset our views on what truly matters and what we perceive to be of value.

This is no more apparent than within investment portfolios and personal pensions, whereby investors are using their financial muscle to vote with their feet and impact change.

The UK fund market alone saw almost £1bn a month allocated to responsible investment funds resulting in total funds under management growing to £56bn as reported by The Investment Association (IA).

Across the Atlantic, the US sustainable fund market saw inflows of nearly $21.5 billion in the first quarter of 2021 according to Morningstar.

In their report on European Sustainable Fund Flows, Morningstar also notes that for the first time, in Q1 2021 more flows went into sustainable funds than traditional funds (representing 51% overall). In addition, global sustainable flows hit record highs for the 4th quarter in a row.

The number of fund options within the space are also rapidly expanding, with more and more of the UN’s Sustainable Development Goals now being covered via various thematic strategies, allowing clients who wish to pursue impact investing greater choice and diversity.

Not just a bubble or a fad?

 

Financial markets are based upon the assumption of infinite growth - the only way is up if you will.

What we have seen however is that the status quo with our reliance on fossil fuels and high level of consumption is anything but sustainable within the constraints of our planet’s resources. Ultimately, we will not be able to sustain our current behaviours for much longer. Climate change is a huge risk to governments and corporates alike, let alone individuals who are already feeling the full force of extreme weather events and rising sea levels.

All companies and all sectors will be affected by climate change, and the pandemic has reminded us how the world’s economy is delicately interconnected. Climate-related risks are one of the most significant considerations any investor should make over the mid-long term.

A sustainable alternative

ESG investing provides advisers and their clients a gateway into a new opportunity for sustainable growth.

The EU’s Sustainable Finance Disclosure Regulation (SFDR) introduced in March has established some much needed regulatory framework for the fund industry. This requires that fund managers understand and show an appreciation of the ESG status of the companies that they invest in.

The FCA is also in the process of implementing their own climate-related disclosure rules for firms, which is aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

These recommendations include guidance on how companies can become more transparent and incorporate climate-related risk into their strategic decision making.

The reshaping of the regulatory landscape combined with stewardship and shareholder action from the fund industry are creating a pathway for ESG investing to become the direction of travel.

“The PRI defines stewardship as “the use of influence by institutional investors to maximise overall long-term value including the value of common economic, social and environmental assets, on which returns and clients’ and beneficiaries’ interests depend.” Principles for Responsible Investment (PRI)

Using their vote as major shareholders, fund managers are able to influence real sustainable change at board level and support the transition to net zero rather than passive divestment alone.

A greener upside

 

The notion that responsible investing provides lower than expected returns is perhaps overly simplistic and does not account for market forces with supply and demand the core driver of performance.

Investor demand for companies involved in clean energy solutions and renewable technologies across all asset types is soaring, and as a result performance in these areas is at an all-time high.

Without doubt ESG is here to stay, and we as an industry can help investors to be part of the change, by offering greater investment choice within the responsible investing sector.

The benefits will be two fold, a more diverse portfolio that mitigates against future climate-related risks and opportunities for sustainable investment growth within our portfolios.


Jon Lockyer
Investment Marketing Analyst