Results from Research in Finance’s annual UK Responsible Investing Study (UKRIS) show that climate change is consistently ranked as the most critical ESG issue for financial intermediaries. Recent news declaring the world is likely to surpass the 1.5° warming limit by 2027 has focused society and accelerated the need to act. The question therefore is: how are investors responding to this persistent, increasing threat?
The answer could be simple: invest for impact and accelerate change.
Targeted solutions that aim to make a positive impact on society offer a potential solution. As the climate crisis grows, understanding of the available solutions is improving and consequently responsible investing is becoming more commonplace. Funds with clear climate targets and demonstrable net zero ambitions are becoming more sought after, as demonstrated by the chart below:
Results from the latest wave of UKRIS research in which we canvassed over 200 Discretionary Fund Managers (DFMs) and Investment Advisers (IAs) shows a definite increase in investment within impact funds from those with good responsible investing knowledge.
Amongst DFMs and IAs, positive screening (including sectors/ companies based on their ESG credentials, for example, investing in renewable energy) is now the most preferred way of implementing ESG. Almost one quarter favour this approach, whilst one fifth prefer broader ESG integration across the fund. Meanwhile, negative screening (excluding sectors/ companies based on their ESG credentials, for example, excluding tobacco or firearms from a portfolio) is much less popular – over a quarter state that this is their least favoured approach. As understanding develops and the market for responsible investing grows, negative screening is clearly not enough for investors anymore. Active management and positive selection is now necessary and outweighs what was once the traditional ‘ethical’ investment approach.
Finally, whilst engagement with investment companies remains lower down the preference list among intermediaries, this group of investors do recognise its value as a tool to be used in the RI landscape. Over two thirds of intermediaries believe that it is better to be invested in and engaged with companies to improve their ESG record, with this sentiment growing over time. Specifically, even when a fund’s holdings are less sustainable, taking an active and engaged approach is more favourable than simply excluding investments based on poor ESG credentials.
The need to bring about change is crystal clear, and our findings show that professional investors recognise their role in doing so. The demand amongst intermediaries for a positive, forward-thinking ESG approach is evident, and impact funds are seen as an attractive solution in adopting that approach. It is worth keeping on eye on impact investing as the climate crisis worsens. Will positive screening become inevitable, and engaged, impactful approaches soon become the norm within responsible investing?
The latest UKRIS wave of research add context to what intermediaries determine to be important factors within responsible investing and highlights where the investment landscape is currently placed. If you would like to know more about the UK Responsible Investing Study, or how to subscribe, please contact [email protected] or [email protected], who will be happy to assist.
*UKRIS is an annual research study, comprising both a quantitative online survey and a qualitative online community, among retail intermediaries. The study aims to uncover the key trends related to responsible investing as well as who the perceived market leaders are for different types of funds. The findings are therefore both important and actionable for investment managers. The Wave 4 online survey was conducted 9th-29th January 2023 among 227 retail intermediaries (100 DFMs and 127 IAs).