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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…

I know what you did this summer

04/09/2019

The first week of September is traditionally associated with fresh beginnings, whether that’s the start of Autumn, a return from holiday, back to school, or, like me, a new role with a new company.

I am very pleased to have joined my former colleagues here at Research in Finance to take on the newly created position of editor and head of content, working with the outstanding research team here who have been busily supplying high quality insights to the financial services industries for the past six years.

The first projects I will be working on include updating RiF’s highly successful Wealth Manager Review, previously published in 2017, and will be looking for spokespeople within the distribution teams of asset management houses as well as wealth managers and discretionary fund managers.

Please get in touch via nataliekenway@researchinfinance.co.uk if you think you can help.

I will also be helping with content surrounding the Responsible Investment Review 2019 so please also contact me if you have comments on ESG or responsible investing.
As we settle back behind our desks, I thought it would be timely for my first blog to provide a snapshot of the major events of the summer:

Political drama prompts sterling to slide further

You may have noticed the UK appointed a new Prime Minister in early summer and Boris Johnson, as previously predicted, wasted no time in getting behind making sure Brexit was delivered by the new deadline of 31 October.

The pound slumped below $1.20 on Tuesday (3 September) morning but had pulled back a little last night after the House of Commons voted 328 versus 301 to take control of the Brexit agenda, allowing MPs to bring forward a bill to force another Brexit delay.

A snap election is increasingly likely so further swings in sterling throughout autumn are inevitable.

FCA to review ACDs after Woodford crisis

Following the suspension of the LF Woodford Equity Income fund on 4 June, the fallout has been far reaching with the regulator and the industry criticising actions by Woodford Investment Management, Hargreaves Lansdown and the fund’s authorised corporate director (ACD) Link Fund Solutions leading up to the suspension.

As manager Neil Woodford continues to liquidate the portfolio and look to larger-cap stocks, the Financial Conduct Authority has reportedly told ACD companies, which are appointed to ensure open-ended funds stick to regulatory rules and protect their investors, to expect a wider review of the sector.

The topic of buy lists also came under scrutiny and with RiF’s 2017 Wealth Manager Review finding that 96% of DFMs use a central fund buy lists, we will be looking at whether processes have been changed in the revised edition (coming soon).

Consolidation continues with Tilney/S&W and Miton/Premier announcements

Hot on the heels of the announcement that Neptune Investment Management was being acquired by Liontrust in late July, Tilney confirmed it was in merger talks with Smith & Williamson to create a £45bn wealth management business, while just this morning Miton and Premier announced an all-share tie-up. Set to complete in Q4, the move will create an £11.5bn asset manager branded Premier Miton Group.

As previously indicated in the 2017 Wealth Manager Review, consolidation in the market will ease firms’ huge regulatory burden so M&A activity will be making the headlines for many years to come but should we be concerned about the pace?

Bond fund rush

The UK’s political turmoil rising tensions surrounding trade wars meant investors begun to adopt a more cautious stance throughout Q1 and Q2. The first Wealth Manager Review said DFMs were largely underweight bond funds in 2017 but Morningstar figures released last month show $487bn piling into fixed income funds in the first half of the year, while stats from the Investment Association showed fixed income was the highest selling asset class for the fourth month in a row in June. And, in another show of investor caution, Money Market funds were the third best-selling asset class.

We will be looking to update DFMs’ asset allocation views and much more – I will be in touch!

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