Environmental, social and governance (ESG) funds are moving from a ‘nice to have’ to an essential part of many asset managers’ suite of products. And it is all seems to be on the back of growing regulatory pressure as well as consumer demand. Ethical and responsible investment have had their false dawns in the past – so why might this time be different?
In mainland Europe, funds using ESG criteria saw net inflows of €44.6bn in 2018 according to Broadridge, overtaking net flows into bond funds and mixed-asset funds. A record 290 ESG funds were launched in 2018. In UK, the Investment Association is conducting a consultation with its members.
Back in the day, most ethical funds were substantially based on negative strategies around excluding, limiting and restricting, which critics complained often generated lower risk-adjusted returns. But positively focusing on governance in particular – and to a lesser extent environmental and social factors – improves returns, and advocates like Hermes say they have the numbers to prove it.
Investors are becoming more aware of the ESG story and the popularity of this investing strategy seems likely to grow – especially if the regulator starts to require advisers to raise the issue with their clients in pursuit of meeting suitability standards. But old attitudes die hard. So, a lot of advisers and their clients will be very slow to adopt ESG.
This year, we will be taking a long hard look at ESG investing as part of our upcoming European Consumer Insights report. Is there really a significant demand from clients? How should advisers raise the issue? What products are needed in the market? Are the concepts still too confusing? Are the data about fund characteristics and performance good enough? If you’d like to share your thoughts, then please get in touch.