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The ESG conversation has changed dramatically in a short space of time. Just last year, research conducted by RiF during its UKAS 360 studies, a rolling quarterly study into the UK retail market, indicated that while investors had got their head around ESG or responsible investing, it was considered a ‘nice-to-have’ rather than a ‘must-have’.
However, this is quickly changing as investors wake up to the fact their investments and savings can have a meaningful impact on social and environmental issues just like their increased recycling and reduction in the use of plastic can.
Not just millennials
There have been a number of programmes and initiatives that have propelled the green movement.
David Attenborough’s Blue Planet and Greta Thunberg’s climate strikes have managed the difficult task of reaching a wide spectrum of age groups with powerful images of the ocean waves full of plastic (Attenborough) and statements such as this (Thunberg):
“Around the year 2030, … we will be in a position where we set off an irreversible chain reaction beyond human control, that will most likely lead to the end of our civilisation as we know it. That is unless in that time, permanent and unprecedented changes in all aspects of society have taken place, including a reduction of CO2 emissions by at least 50%.”
Additionally, following the success of the April protests Extinction Rebellion have chosen Good Money Week (running from 5th to 11th October with the aim of encouraging businesses to take action to turn ‘bad’ money ‘good’) to again “peacefully occupy the centres of power and shut them down” in major cities around the world including London as it further attempts to push climate issues further up the agenda.
All these efforts are working in the sense that our children no longer want to use plastic bottles or straws (#savetheturtles) and the UK government has banned said straws as well as cotton buds and stirrers from April 2020.
With more people than ever before being mindful in their impact on the environment, individuals are finally addressing this in their pensions and investment portfolios.
The change in attitude is reflected in the numbers; in RiF’s Responsible Investment Review retail intermediaries reported 74% of their clients were holding ESG/sustainable funds + socially responsible/ethical funds and indicated further interest for add more.
Asset managers have responded fairly well to demand so far – Morningstar data shows the number of sustainable fund launches climbed from 26 in 2016 to 104 new vehicles in 2018, and a further 168 new launches in just the first half of 2019. There are now 2,232 open-end and exchange-traded funds sitting in this area in Europe, with a total assets under management of £534bn.
And, we are only at the beginning: 86% of millennials are interested in sustainable investing, according to the Investment Association, while a new government-led study on financing the progress towards the UN’s Sustainable Development Goals (SDGs) has found that more than two-thirds of UK investors want their portfolios to solely support projects driving progress against the 17-Goal agenda.
Additionally, just this week Guy Opperman, the Minister for Pensions and Financial Inclusion has written to 50 of the country’s biggest pension funds asking them to disclose provide the ESG, stewardship and members’ views sections of their statements of investment principles, so that he can compile a record in order to monitor compliance and highlight best practice.
He said: “Pension funds are a powerful weapon in the fight against climate change. Despite some good work by a number of schemes, some are not acting. We need urgency on this vital issue from trustees and investment managers.
“New regulations came into force last week, I’m demanding that the remaining pension schemes and the fund managers they appoint stop shuffling their feet.”
The direction of travel is clear. Pressure for more ESG options in investment portfolios is coming from both the government and the end investor. While many asset managers are responding by incorporating ESG into investment portfolios and their business practices, those that aren’t should really be asking themselves if this is something they can afford to be left behind on.
Alongside the Responsible Investment Review here are RiF we are also launch the UK Responsible Investment Study (UKRIS) a regular study in this increasingly critical area. This study shall focus squarely on professional investors, retail and institutional, and their view of ESG and responsible investments.
This biannual syndicated study will truly be one of a kind, and as such aims to gather support from many asset management firms. For more information on this study email us here and the team will send you a synopsis of the project.
The Investment Association’s update on UK fund flows delivered yet more bad news to managers of UK equity funds with another £697m fleeing the asset class in August – that brings the total outflows year-to-date to £2.8bn and a staggering £15.1bn since the start of 2016, the year the UK voted to leave the EU.
As Prime Minister Boris Johnson attempts to push through his version of the Brexit deal with less than a month to go until the Halloween deadline to leave, sentiment for UK stocks couldn’t be much worse.
Furthermore, UK equities were far from alone in seeing outflows in August with overall net retail outflows of £1.7bn, a jump from outflows of just £16m seen in the same month last year.
Equities, fixed income and property all saw significant outflows, however, the diversified and less volatile sectors saw inflows indicating the investor was firmly in the risk-off camp.
Mixed Asset was the best-selling asset class with £706m in net retail sales, while sectors grouped into Other (which includes the Targeted Absolute Return, Volatility Managed, Protected and Unclassified sectors) was the second best-selling asset class with £168m of inflows.
Interestingly, Money Market was the third best-selling asset class with £36m in net retail sales.
A further indicator of investors’ caution is the movements in the VIX – the measurement of the 30-day implied volatility of S&P 500 index options – which ticked higher over the summer and then again towards the end of September to around 20.
As the equity cycle enters its later stages and the number of bonds around the world posting negative yields tops $16trn, it is unsurprising that investors may be looking to batten down the hatches. Once perceived a safe haven, trade press articles this week report that wealth managers and multi-managers alike are ramping up gold exposure particularly as political turmoil in the UK and abroad shows no signs of abating.
The market sell-off seen in equities this week – the FTSE 100 is down 4.7% over the past five days of trading – has already prompted speculation that the fourth and final quarter of the year will be its most volatile, echoing last year.
Adrian Lowcock, head of personal investing at Willis Owen, commented: “Recession fears are back at the forefront of investors’ minds. The global outlook has been negative since the summer and concerns have been growing. The global economy has been slowing down as the US trade war with China affected all countries. On top of this, the geopolitical landscape is worrying. A possible impeachment of Donald Trump, fears of a no-deal Brexit and rising tensions with Iran in the Middle East all mean investor sentiment is weak.”
However, Edward Park, deputy CIO at Brooks Macdonald, said that weaker US ISM manufacturing data which came out on Tuesday is the likely catalyst of this week’s equity weakness but he isn’t entirely convinced it will lead to a full-blown correction…yet.
He said: “We do not see this early fourth quarter weakness as heralding the end of the equity bull market however the central bank reaction to declining US data will be key for equities going forward. At the moment, sentiment seems reasonably sanguine with traders and clients more accustomed to volatility after Q4 2018 as well as May and August 2019.
“Should we see services PMIs start to slip and join the weaker manufacturing data in contractionary levels we would expect market expectations to be revised down catalysing a selloff. For the time being, we are keen not to focus too precisely on one data point and await further data to support a slowdown narrative.”
Over the next few months, I will be researching sentiment in the DFM market, gauging asset allocation changes as well as probing what wealth managers think are the safe havens on the 2020s, which will be published in the Wealth Manager Review 2020. For more information or to participate in this research please contact firstname.lastname@example.org