Sustainable investing has morphed into a catch-all term over time. Having found its feet among institutional investors, the area is increasingly creeping into retail investor vernacular. Its umbrella nature covers strategies focused on environmental, social and governance (ESG) factors, impact investing, sustainable-focused stockpicking, socially responsible and ethical approaches.
As a concept, sustainable or ESG investing began with engagement, with asset managers actively engaging with companies and voting down bad governance decisions. This eventually morphed into what became known as ‘exclusion strategies’, where stocks exhibiting specific characteristics would be removed from the universe of investable companies.
It is in these two strategies where the significant majority of UK assets remain, according to ESG data provider UK Sustainable Investment and Finance Association (UKSIF).
In a report published last year, the body said €2.6bn (£2.3bn) was invested in engagement strategies at the end of 2015, an increase of 53 per cent from 2013. There is €1.9bn invested via exclusion strategies – with the space seeing assets under management (AUM) almost triple in the two years.
UKSIF’s figures also show strong growth in other areas, with sustainable funds seeing AUM almost double, and impact investing nearly quadruple. Momentum is building, in particular among retail investors. Data from the Investment Association (IA) shows ethical funds saw AUM grow from £10.7bn to £13.4bn in the year to April 30. However, their percentage share of overall assets remains anchored at 1.2 per cent.
Several fund groups have also found their feet – with an ESG overlay becoming a core part of Stewart Investors’ offering, for example. Hermes and Royal London Asset Management are other firms known for providing ESG and sustainability-related investment strategies.
Fund launches addressing demand in the sustainable universe are increasingly commonplace, even among wealth managers who have begun designing their own fund of funds and model portfolio strategies to meet client needs. Supporting this demand is a better understanding among retail investors that investing in sustainable, ethical and ESG funds does not necessarily come at the cost of performance.
David Gait’s Stewart Investors Worldwide Sustainability fund, for example, has doubled investor money in five years, compared with a 75 per cent gain in the MSCI World index. Similarly, the Premier Ethical and Kames Ethical Equity strategies have outperformed the FTSE All-Share by 53 and 17 percentage points, respectively.
The market beta has also held up relatively well. Looking at index provider FTSE’s range of ethical and ESG indices, FTSE4Good, shows that both the UK trackers matched their general benchmarks. The European index underperformed by only 5 percentage points in the short term. But over five years the European and global funds underperformed by 13 and 15 percentage points, respectively.
UKSIF says ESG, socially responsible and sustainable investing has exploded in the UK, with current AUM undoubtedly higher in the years since 2015.
The space is expected to grow further as younger investors enter the market. Funds that entered the retail market while ESG and sustainable investing was merely a topic for the pension fund trustee are now starting to benefit.
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