Investors flooding into ESG and responsibly invested funds are being cautioned that the drivers of the strong performance in recent years could easily stall going forwards.
According to recent figures from the Investment Association, net retail sales into responsible investment funds reached £1.2bn ($1.66bn, €4.1bn) in January 2021, with UK savers putting on average £1bn a month into these funds in 2020.
To give a further indication in the surge in demand for ESG funds, at the end of 2020 EPFR ESG funds assets under management reached $1.6trn (£1.16trn, €1.35trn), having increased 10-fold since 2017.
Meanwhile a recent report from PWC estimates ESG funds will account for 25% of all fund flows by 2025, and their base case scenario estimates assets will have risen from $1.6trn to $5.5trn.
Covid moral compass
From a UK perspective, according to the IA responsible investment funds under management now total over £56bn, growing some 66% in the last 12 months. Total net retail sales over the last 12 months was £12.4bn, accounting for 43% of total net sales.
“Responsible investment funds were the shining light of 2020,” commented Kate Marshall, acting head of investment analysis at Hargreaves Lansdown.
“Against the backdrop of a global pandemic and uncertainty about our futures, investors honed in on their moral values and ethical credentials,” she added. “Environmental, social and governance (ESG) concerns have become more important in many ways, including the way investors think about what to do with their hard-earned savings.”
Market pivot
But, while investors are considering their hard-earned savings, one concern might be the performance of these funds going forward.
For this reason Ryan Hughes, head of active portfolios at AJ Bell, said it is vital investors understand what they are buying and any biases that may come with it.
“There is a high correlation between many ESG focused funds and the growth style, not least because much of the capital light businesses that have prospered in the last couple of years score well on an ESG basis,” said Hughes.
“As a result, many ESG funds are performing very well and it is possible that some investors coming into these funds more recently may be doing so for performance reasons and perhaps not necessarily understanding what this means when the market pivots away from rewarding these companies as is currently happening,” he added.
When the vaccine news was announced late last year, Hughes said the valuation gap between growth and value had reached extreme levels. Now, he added, areas such as oils and miners are starting to perform strongly.
“Naturally these sectors are not often found in funds with a strong ESG focus,” he said. “As a result, this is definitely being a headwind for ESG focused funds and may be for a while given how underweight many investors are in value stocks.”
Editor’s Note: In association with our sister publications, International Adviser has launched a Campaign for Better Governance.
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