After attracting record inflows over the last few years, investors are more recently reported to have fallen out of love with sustainability-focused funds[1].
Does this mean ESG issues are dead in the water? Or is this merely a bump in the road?
Greenwash and backlash
Increased scrutiny of the investment sector’s role in wider societal issues has seen high-profile incidents of greenwashing among asset managers[2]. More recently, as oil and gas prices spiked, many ESG funds have underperformed against those that can hold fossil fuel companies[3]. It is little wonder that some investors have been left with a bad taste in their mouth.
Coupled with this, there is a growing political backlash against sustainability initiatives, most notably in the US. Governments face tough choices, weighing up the cost of long-term societal benefits with short-term cost pressures.
Stuck between a rock and a hard place?
For advisers concerned about their clients’ long-term interests, this can make for tricky conversations. If governments are clawing back on their green promises, does this mean investors are also re-evaluating their commitment to ESG? In addition, with sustainability regulations due to come into force in the UK, where does this leave advisers recommending responsible funds to help clients achieve their financial objectives?
We find ourselves in an uncertain world where issues like responsible investing have become polarising. However, the threats that have pushed sustainability issues to the fore have not gone away. Climate change has only become more prevalent in our daily lives, with its effects starting to be felt in food prices and holiday destination choices. Unequal societies pose a threat to law and order. Poorly governed entities put shareholder returns at risk.
The ESG bandwagon
We believe it remains vitally important that investment managers assess a company’s ability to protect and enhance shareholders’ capital, as opposed to simply judging its short-term profits.
This means there is still a place for investments that place a higher importance on ESG considerations, provided this is implemented thoroughly. As investor money flooded into responsible funds a few years ago, many asset managers rushed to label their funds in this marketplace, regardless of the substance behind their claims.
In practice, this meant investors were potentially buying products positioned as being more ethical than the holdings in the portfolios really were. Since then, changes to regulation will focus on an important role in weeding out greenwashing[4]. In our view, sensible measures that can stamp out investor harm should be welcomed.
ESG’s rebrand
Indeed, ESG-focused funds still exist, but many are now instead branded as ‘thematic’. As thematic investors for more than 20 years, our themes reflect the trends that we believe will shape our world for decades to come
This approach to investing aims to futureproof portfolios, as it is based on finding the best global opportunities regardless of location or sector. Crucially, we are willing to walk away from an investment if we are not satisfied that its way of doing business can survive in the long term.
What does this mean for your clients?
Many of your clients are likely saving towards their retirement or funding their children’s education. This makes it all the more important to ensure their capital is allocated in a way that meets the needs of the present, without compromising the needs of future generations.
If this is a priority for your clients, it is crucial to scrutinise investment managers’ methodologies for evaluating a company’s sustainability metrics. The UK’s sustainability disclosure regulations (SDR) that are due to be implemented later this year aim to standardise the sustainability information consumers should have access to.
For more guidance on how to speak to your investment managers about responsible investing, here are seven questions that can help spot potential greenwashing.
[1] Global Sustainable Fund Flows Report Q2 2023, Morningstar, July 2023
[2] ‘A broken system needs urgent repairs’, The Economist, July 2022
[3] ‘Big ESG funds are doing worse than the S&P 500’, Bloomberg, December 2022
[4] FCA update on Sustainability Disclosure Requirements, March 2023
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