Why ESG investing is becoming the norm

A lot of investors say they want to put their money into “ESG” funds. But unless you actively opt for a “sin” fund jammed full of companies behaving badly, that’s probably what you’re getting anyway, says Merryn Somerset Webb.

Last year was the year ESG investing (finding homes for your money while looking out for environmental, social and governance concerns) really took off –in 2020, $152bn of new money poured into ESG-labelled products and the total global assets in these products hit more than $1.6trn.

The young are all over it. A new survey from Montfort Communications, a PR company, and Boring Money, a financial news website, makes the point: in a poll of retail investors, some 63% of 18-34-year-olds say they would choose a new fund manager based on their approach to ESG. That number falls to 17% for the 55-plus group. In the younger group, 78% of respondents say ESG affects their investment choices. That falls to 67% among the 35-54 age group and about a third of the 55-plus group.

The 2021 ESG Investor Insights Report from Natixis, the French banking group, reports that 68% of savers surveyed say they want their investments to consider the impact on people and the planet, with the young more enthusiastic than the old.

These numbers will tally with many you may have seen before. Ask anyone if they’d like to be nice – or seen to be nice – and mostly they will say yes, with the young saying yes a bit more often (either because they are more interested in ESG or because they are more interested in optics – we can’t know). Lovely.

The problem with ESG investing is that it is hard work – you have to do actual research if you want to find a fund to suit your preferences. That might be one reason ESG action doesn’t seem to match ESG survey-answering.

In a recent Aegon poll, 77% of those surveyed said that they think climate change is an important risk to consider when investing. But only 15% of the same people say they are following that thought up with active ESG investing. And the many people who say they want their investments to align with personal values? It isn’t clear they’re following their thoughts either: UK financial professionals say that only 42% of their clients asked about ESG in 2020.

ESG investing may actually be the default now

Good news then: it might not be necessary for you to do anything at all. If your ESG feelings are of only average intensity it might already have been done for you. In 2019, 39% of investing institutions said they did not implement specific ESG policies. In 2021, only 28% said the same, says the Natixis report. So, more than 70% of institutions are now ESG a-go-go. The number saying they integrate it into their processes was up from 19% to 48%, with various impact/active ownership/best in class strategies making up the rest (ESG is marketing buzzword heaven).

You may say that these definitions appear to cover pretty much any activity (I’d agree), that, while regulators are working on the standardisations, the definitions of all these are in many cases so blurred as to be meaningless; and that everyone’s criteria are completely different (one investor’s green dream is very often another’s sin stock).

You might also say, if you were so inclined, that this divergence of measurement makes a nonsense of the idea (held by 53% of institutional investors) that companies with better ESG records generally post better investment returns on their stock. Perhaps those returns are not a function of corporate performance but, at least in part, a function of the demand for their shares generated in the scramble for ESG-friendly portfolios?

Nonetheless, it is very clear that the mood music has changed. Everyone is ESG investing, partly, it would seem, because that’s what the young say they want – and they’re the ones now financing the greatest industry bonanza of all time (auto-enrolled pensions). As Nick Bastin of Montfort says: “These long-term potential revenue streams represent a massive opportunity that asset managers ignore at their peril.”

However, it might also be that the shift is about more than what the kids want. Fund managers have to follow the regulations, and regulation is getting to the point that it pretty much mandates attention to ESG issues.

Around the world, for example, ESG reporting is being made mandatory for asset managers – and the idea that all managers have ESG responsibilities is now standard. Here’s Sir Jon Thompson, chief executive of the UK’s Financial Reporting Council, on our new Stewardship Code for asset managers: “There is a clear and consistent expectation that environmental, social and governance issues, including climate impact, are included in stewardship and investment decision-making.”

If you want to be a well-regarded brand in the asset management market place, you’ll at least want to look like you are living up to those expectations. Talk to any of the big-name fund managers and they’ll tell you about their ESG overlay and their stewardship department. That department will be operating throughout the business. The upshot is this, whatever the labels say, whether you buy an ESG fund or a non-ESG fund from a big-brand fund manager, you will still be buying one with some kind of an ESG overlay –there isn’t really any other kind any more.

The difference, for what it’s worth, will be in the portfolio. There are lots of niche do-good funds of course (related to renewable energy and the like), but in general, if you buy an ESG-labelled fund, the odds are you’ll get a quality growth fund probably with a bias to tech with a lot of blurb in the marketing about ESG. If you buy a non-labelled fund you’ll get whatever else it says on the tin (income, growth, global, whatever) with a lot of blurb in the marketing about sustainability.

So you could see the way in which survey respondents fail to follow through with action as a problem –their fine words butter no parsnips. Or you could note that an ESG fund will mostly have much the same effect on the world in which we live as a well-run non-ESG fund. In this sense, everyone, apart from those who actively want a “sin” fund jammed full of companies regularly behaving badly, is already mostly getting what they say they want, whether they know it or not.

•This article was first published in the Financial Times

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