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The rise and rise of responsible investing

28 February 2020

Events in the early days of 2020 have continued to drive climate change and responsible investing up the global agenda.

Bushfires wreaked an unprecedented amount of damage in Australia and triggered a renewed and vigorous debate on the country’s environmental attitudes and policies.

Climate change was the biggest topic of conversation at the World Economic Forum in Davos, where campaigner Greta Thunberg told leaders that “Our house is still on fire. Your inaction is fuelling the flames by the hour”1.

And, looking ahead, the spotlight will be firmly on Glasgow in November, where the 26th Conference of the Parties (COP26) will take place. There, delegates will seek to reconfirm the goals set in the Paris Climate Agreement during the COP21 meeting in 2015.

Asset managers are taking notice

In his annual letter to investors this year, Larry Fink, chief executive of BlackRock, warned that “Every government, company, and shareholder must confront climate change”2.

In fact, asset managers are increasingly putting the topic front and centre, even as questions continue to be raised as to whether they are walking the walk. In BlackRock’s case, research last year found that it had a habit of failing to support climate-related shareholder resolutions when they arise3.

Facts and figures

  • Money going into UK funds focusing on environmental, social and governance (ESG) issues leapt from £3bn to £10bn last year4.
  • More than seven in 10 respondents to the Fidelity Analyst Survey 2019 said firms were increasing their emphasis on ESG policies5.
  • £4.4bn was invested in ESG funds in the first 10 months of 2019, according to Morningstar, up 53% on the same period a year earlier6.
  • 85% of investment managers said they integrate ESG factors with the aim of improving long-term investment outcomes for their clients7.

Your clients may want to take action

You may find yourself under increasing pressure from clients to engage on the topic of responsible investing and ESG issues over the coming months.

For clients interested in these areas, your support could be invaluable. Investing in the sector isn’t straightforward and there are several issues that you can help them deal with as they explore the options available.

1
Understanding client goals

Advisers have a big role to play in exploring exactly how clients want to invest responsibly. Do they want to avoid certain types of companies, such as oil majors or tobacco manufacturers? Do they specifically want to invest in companies active in the fight against climate change? Do they want to invest in funds that engage with companies in a bid to improve their governance practices? Or perhaps are they interested in impact investing and projects that make a positive social impact.

While clients might have arrived with a list of areas they want to avoid investing in, further digging may uncover specific concerns around issues such as tax avoidance, executive pay and climate change. The outcome of that discussion will likely narrow the field of options available to them and make the next step easier.

2
Researching the options

There’s a wide range of funds under the ESG umbrella. While that’s good news, it raises the risk of selecting something inappropriate. For instance, clients may not realise that some funds labelled as ESG or ‘ethical’ will have criteria that means they still invest in companies that many would consider contrary to those principles.

Similarly, while a lot of fund firms talk a good game in this area, some devote more resources to it than others. For example, does the firm have a team of analysts dedicated specifically to ESG research? Does it measure and report on its activities? Does it invest in the science and data capabilities that analysts and fund managers need for interrogating company ESG policies and actions?

Working out what’s available, the specific criteria applied by different funds and exactly how they invest may entail a fair amount of research. And, as interest in responsible investing continues to grow, being able to differentiate between slick marketing - or ‘greenwashing’ - and genuine, sustainable propositions will become increasingly important for advisers.

3
Staying focused on returns

For your client, there is growing evidence to support that investing in line with their principles doesn’t have to mean compromising on returns. A 2015 overview of the thousands of studies on the link between ESG criteria and corporate performance revealed that most such research supported the business case for ESG investing8 .

More recently, in its October 2019 Global Financial Stability Report the IMF reported on research that found the performance of “sustainable” funds to be comparable to that of conventional equity funds. It said there was no “conclusive evidence that sustainable investors underperform or outperform regular investors for similar types of investments”9.

Facts and figures

  • More than three-quarters (78%) of investors aged 18-24 have been prompted by the climate emergency to consider where their money is being invested, according to research by Triodos10.
  • Nearly four in 10 global investors already have some sustainable investments in their portfolios, the UBS Investor Watch survey found11; 82% of UK investors expect returns from sustainable investments to either match or surpass those from traditional investments.
  • Almost seven in 10 UK investors surveyed for Good Money Week 2018 were in favour of legislation requiring financial advisers to ask clients if they wanted to exclude specific sectors or companies12.

Responsible investing is here to stay

No matter your personal views on ESG and responsible investing, the facts suggest it’s likely to be a conversation more clients will want to have in future.

Important information

Please remember the value of your clients investments and any income from them can go down as well as up and your client may get back less than the amount they originally invested. Past performance is not a guide to future performance.


1 Democracy Now - “Our House Is Still on Fire”: Full Speech by Greta Thunberg at World Economic Forum in Davos - 21 January 2020

2 Euromoney - BlackRock needs to walk the walk on climate change - 22 January 2020

3 Euromoney - BlackRock needs to walk the walk on climate change - 22 January 2020

4 This is Money - Weather fear triggers rush for ethical investments as inflow for ESG funds jump from £3bn to £10bn - 18 January 2020

5 Fidelity - Analyst Survey 2019: The end of optimism - 2019

6 Good Corporation - Is ESG a ‘nice to have’ or an integral part of corporate strategy? - 17 December 2019

7 LCP - Nearly a third of investment managers still not considering ESG factors for all asset classes - 8 January 2020

8 Journal of Sustainable Finance & Investment - ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies - 19 December 2015

9 CNBC - ‘Sustainable’ investors match the performance of regular investors, new IMF research finds – 10 October 2019

10 Triodos - ‘It’s not for serious investors’: seven myths of ethical investing busted - 6 Jan 2020

11 UBS - UBS Investor watch: Return on values - 2018

12 Good Money Week - New Good Money Week/YouGov poll results announced - 31 October 2018


Support for your clients

You may find our Introduction to ESG investing useful when it comes to helping your clients navigate through the responsible investing maze.

Download the guide