The Rise of ESG Investing
Ten things you need to know right now
Published by Aviva Investors August 20
Thanks to Covid investors have been understandably nervous about their investments, subjecting them to a level of scrutiny hitherto unheard of since the crash of 2008.
During all of this many have come to realise that ESG funds have performed surprisingly well. A study by Moneyfacts found that over the last year the average ethical global fund was up by almost 15%, against 3% from non-ethical global funds.
So by way of a brief introduction, here are ten things about ESG (Environmental, Social and Governance) you need to know:
(1)Interest in ESG is on the rise
Research indicates that most investors think of ethical investing as ‘nice to have’ (40%) as opposed to a ‘must have’(25%), but demand from Millennials is on the rise, particularly over climate change.
Even though many people still prioritise low levels of risk, liquidity and short term growth over all else, the rise of ESG has led to a launch of several new funds in Europe alone this year.
(2)You’ll need to ask clients about their ESG preferences in 2021
The European Commission are expected to introduce a new package of legislation (Mifid II) in 2021 that will include environmental, social and governance, as well as sustainability investment practices. Asking clients about their ESG preferences will be mandatory. If you don’t, you’ll have to answer to the FCA.
Even IFAs who aren’t in favour of ESG or have clients who express disinterest will still have to show ESG knowledge and assess the sustainability risk of their non-ESG investments.
(3)Clients are more likely to trust adviser’s advice
Thanks to the Covid-19, appreciation of advisers’ expertise has never been higher.
During the pandemic confidence in investments took a nose dive from 100% to 62%, and many investors turned to their advisors for help.
As a result 42% of those who usually use a Financial Adviser say that they are currently more likely to act on their advice post-Covid.
So now is an excellent opportunity to put in the work and present the case for ESG.
(4)ESG is a complex business
It’s very hard for companies to tick every social, ethical, environmental, governance, sustainability box.
Facebook is no different. MSCI rates it highly, while Sustainalytics rates it low.
It’s an incredibly complex area. Hence why many advisers are bringing in a Discretionary Fund Manager (DFM) to deal with Fund providers for them.
(5)Lack of clear ESG ratings is an issue
Boohoo – the fast-fashion retailer was given an AA rating by MSCI for above-average labour standards just weeks before The Sunday Times reported that its workers were paid below minimum wage and subjected to poor working conditions.
Boohoo promised to conduct an independent review but the scandal only goes to show how ESG classifications can be misleading.
Of the 20 ESG Funds that had invested in the fashion retailer, many have since pulled out.
(6)Ethics are extremely personal
Client A might be anti-tobacco production. Client B might be against tobacco production and retail, in which case you have a much smaller investment universe to choose from.
Also one man’s poison is another’s pleasure. Alcohol, pornography and gambling could be on one clients’ black list, and on another’s to do list. You’ll never know until you ask them to complete a questionnaire.
(7)Green isn’t always black and white
Investors are often shocked when they discover that their environmentally friendly portfolio includes tobacco or oil.
This is because green credentials can range from (a) companies trying to do better right now to (b) companies taking a long-term approach by, for example, installing solar panels as an alternative energy source.
(8)The UK leads the way in ESG in Europe
According to research the UK is the 'leading European market' for ESG investments, with £6,439bn assets under management in pension funds.
Growth in Europe is predicted to be 9.3 % in Europe, and 10.5% in the UK (from 2017 to 2025).
Brits, it would seem, are ahead of the curve.
(9)Europe puts its money where its mouth is
Non-profit organisation, InfluenceMap, put world’s leading fund managers under the microscope to see how they rated on climate change.
American funds didn’t fare as well as their European counterparts, tending to vote alongside American management of fossil fuel intensive companies more often than they did for other companies. On a scale of A to D they tended to achieve a C or D.
In Europe however, L&G, Aviva, UBS and BNP Paribas all achieved A grades.
(10)Make My Money Matter
Though most advisers support ESG in principle, many are wary of ‘greenwashing’, which is why organisations, policy makers and the financial industry need to pull together to provide clarity and direction.
To that end a campaign called Make My Money Matter has just been launched to promote ESG investing, fronted by Richard Curtis, the writer of Love Actually, and Mark Carney, former Governor of the Bank of England.
Currently there’s about £3 trillion invested in UK pensions. Much of which is invested in harmful industries like fossil fuels, tobacco, and arms.
Make My Money Matter’s survey of 4,500 adults conducted in early June discovered that while 70% of people in the UK want their investments to be responsible, only £2 out of every £10 is invested this way.
Moreover 57 per cent of UK those with a pension want to see their savings invested in building a better future for people and the planet after coronavirus, while 52 per cent want them used to help tackle climate change.
Previously Carney has warned that unless pensions funds and other businesses wake up to the climate crisis they risk seeing their assets become ‘worthless’.
But on a more positive note, he claims ‘when business gets behind what society wants, it can do extraordinary things.
'This could turn the existential risks from climate change into the greatest commercial opportunity of our time.’
Sources: Investor Index published May 2020, based on fieldwork carried out 15th - 22nd April, reviewed and analysed by experts at AML and The Nursery.