On the surface, this is a success story for environmental, social and governance (ESG) investing, but dig a little deeper and it becomes clear these funds have spent the past decade struggling to shine, eclipsed by an identity crisis.
The Investment Association’s latest figures revealed £1.03bn ($1.43bn, €1.15bn) of sales in 2017 and when compared with 2016’s £625m, it is easy to agree with IA chief executive Chris Cummings who said last year’s inflows showed sustainable investing was “an increasing priority for today’s investors”.
Indeed, over the last decade assets under management (AUM) in ethical funds increased from £4.53bn in 2008 to £15.4bn in 2017.
However, when taken as a percentage of total UK AUM, ethical funds have only seen a 0.1% increase over the period, from 1.2% to 1.3%.
Given the rhetoric around ESG and the numerous launches in the past year for ‘ethical’, ‘sustainable’, ‘thematic’ and ‘impact’ funds, you’d be forgiven for asking why is it that people are talking the talk but not walking the walk.
Morningstar research has found that active funds with a sustainable tilt have bucked the wider industry trend that has seen outflows from conventional active funds. It also showed passive sustainable strategies have seen a “high and stable growth” over the past five years.
It found the market share of actively managed funds classified as ‘sustainable’ in its database increased from 11.4% in 2015 to 12.4% in 2016 and 12.7% in July 2017. Meanwhile, over the same period the market share for passive sustainable funds marginally increased from 1.5% to 2.4% and 2.4% respectively.
Institutional investors lead the way on sustainability, but interest from retail investors is growing, according to Global Sustainable Investment Alliance figures which show they accounted for 25.7% of global assets in sustainable funds in 2016 compared with 13.1% in 2014 and 10.7% in 2012.
Hortense Bioy, director of passive funds research, Europe, and sustainable investing research specialist at Morningstar, concedes the speed of traffic is slow, but says “we have seen inflows into those funds”.
“You have more products, but those products have been launched to meet demand,” she adds. “We see consumers changing their behaviour and more investors want to make an impact.
“In general, we see investors care more about the companies they invest in; it is not just about making money anymore.”
Why so slow?
If there is such a demand and everyone’s talking about ESG, why then are the flow percentages still very small?
ESG clearly has an image problem. Simply labelling something ‘ethical’ or ‘sustainable’ is not clear and therein lies the problem, as Matt Christensen, global head of responsible investment at Axa Investment Managers, says.
“In the UK there is a lot of excellent talking about the topic, but I still question the money flows from the UK into this – it is not clear,” he says. “It is a question about whether there is a connectivity between the great talking and the money flows into it.”
Christensen says investors are “suspicious, confused or curious at best” by the various terms associated with ESG that are bandied about.
He adds: “It has been a hard area to create a simple story of what it means to do these different types of techniques. That might be an ESG integrated approach versus an impact investment approach and some people are going to say, ‘I don’t know the difference, what does that mean?’.
“I think that unfortunately it makes it challenging for the punter who just wants to say, ‘Give me a good sustainable investment product’.”
The Marmite effect
Jason Hollands, managing director at Tilney Group, agrees that ESG is suffering an image problem. As such, he says it is regarded like “Marmite” and people wrongly assume investing in such funds will result in reduced returns.
These misconceptions are often reinforced by the marketing behind them which tends to be daubed with images of wind turbines and trees, he adds.
“In reality, most ESG funds are invested in very recognisable companies, not niche green energy companies or social impact projects,” says Hollands. “The pigeonholing of ESG as a niche interest can sometimes mean investors are only offered such funds on request, rather than proactively presented with them as an option, so I suspect the latent interest is not being fully realised.”
Hollands says ultimately awareness of ESG factors should be part of good risk management and not just something of special interest to investors with strong principles.
“After all, companies that are transparent, have good governance and are aware of their operational reputational risks are simply more attractive stewards of capital than businesses that are opaque or cavalier.”