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As ethical fund sales continue to soar, how long until ESG investing becomes mainstream?

06/09/2019

It is no secret that ESG and responsible investing have become increasingly popular but figures from the Investment Association released yesterday show net retail sales into ethical funds has exploded.

In 2012, just £16m of net retail sales flowed into ethical funds. This has grown to £625m in 2016, £1bn in 2017 and £1.3bn in 2018.

Despite a slower start this year with ethical fund sales of £64m in Q1, this figure soared to £586m in Q2 – a considerable jump compared to the £330m reported in the same quarter last year.

Again, there is no secret that there are many different ways to define ESG – something which has caused its own debate – and the above stats reflect flows into open-ended ethical funds. The IA classifies ethical funds based on the certification of a third-party, EIRIS, which are funds that “aim to avoid companies involved in activities believed to be harmful, such as tobacco production or child labour. Some funds also aim to actively invest in companies which promote responsible policies such as recycling.”

So the above figures may not encompass those labelled ‘responsible’ or ‘impact’ funds, and ETFs, that are also seeing a steady increase in interest for more responsible investing, will not be included in IA data until next year, indicating the growth is just a snapshot of what is really going on.

As highlighted in Research in Finance’s recent study, the UK Responsible Investment Review, which was made available to asset managers in May, over £24bn has been invested in socially conscious open-ended funds (according to Morningstar, as at 31 December 2018) accounting for 6% of total open-ended fund assets and these funds were responsible for 15% of total net flows into open-ended funds.

Conversations with industry experts in this field indicate we are merely on the cusp of this exponential growth, particularly in the DFM space, as a more mindful investor takes form.

Liontrust’s Mike Appleby, investment manager in the sustainable team, says the global economy itself cannot continue developing without tackling ESG issues such as climate change.
“The ramifications of consumer preferences and the raft of future regulations required to combat climate change (current regulation simply will not get us there) are huge and will have a material impact on the success or otherwise of businesses. The scale and persistence of this trend is underestimated by the market… The good news is that, at long last, it appears this is being widely acknowledged as a risk we have to address.”

In the Responsible Investment Review, retail intermediaries said the top three drivers for the take-up of ESG investing were; a. an increase in the number of ESG/sustainable funds available b. changing demographics of end clients and c. more longer-term performance data for ESG/sustainable funds.

With the plethora of ESG-conscious funds being launched, more enlightened attitudes towards the value of responsible investing, particularly among the younger generations, and many vehicles attaining their three years (if not much longer) track records, it is clear that responsible investing is a part of the investment industry’s mainstream future.

On the back of the demand for the Responsible Investment Review, RiF will be creating the UK Responsible Investing 360 to answer the crucial questions asset managers have around the increasing demand for sustainable and ESG investing. The study will be a deep dive into investors’ awareness and level of understanding surrounding the various monikers for responsible investing and provide analysis of ESG messaging adopted by brands. It will also bestow detail on the measurement methods used by fund selectors and look at how much appetite has increased, while also providing asset managers with competitor analysis.

Additionally, the study differs in that as well as garnering detailed professional investor opinion, RiF will also engage its investor community in online activities such as diary tasks so that stakeholders can gain in-depth insights into the day-to-day activities and the hopes and frustrations of ESG supporters, and will also be supported in the future with thought pieces, videos and event content.

The first part is due to launch 1st October so to be involved, get in touch…

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