Advisers are starting to discuss how responsible / ESG investing can be profitable in their conversations with clients, our new research finds. Investors, they say, can “do well by doing good”.

Advisers’ concerns about the downside risk of poor returns from these investments haven’t completely disappeared – far from it. But we’re finding that advisers have increasingly drifted away from their traditional views of responsible investing. So we need to understand what’s caused this shift if we are to assess the longer term impact on the UK fund market.

Institutional investors have been integrating environmental and social factors into their investment processes for a while. Corporate behaviour that damages the environment, breaks with social norms or arises from poor management and control structures is too dangerous and will lead to trouble – it is no longer acceptable. There is a drive to make companies pay for their negative externalities, which will impact on their profitability. Sustainability has become core to the institutional investment process, if only just from a risk management perspective.

The big question is whether the retail market will take the same approach. Are advisers and their clients waking up to a new irreversible reality – or has the 2020 outperformance of some responsible funds in 2020 temporarily blinded them and we soon will return to business as usual?

Our research points towards the view that that advisers’ adoption of responsible investment is sadly more driven by strong short term performance figures. In contrast, the revolution taking place among most asset managers has been more firmly rooted in a much deeper appreciation of how the investment world has changed.

The eventual reversion to the mean of investment performance won’t surprise asset managers, but will probably lead many private investors and their advisers to revert to their old habits and investment practices. “Doing well by doing good” is a catchy marketing slogan but it risks raising unrealistic expectations about future out-performance.

We’re publishing our Impact of ESG on UK Fund Distribution report in February. A launch event will take place at 10am on 25 February; click here to book your place.