A persistent challenge for advisers in recent years has been the lack of a clear definition of many of the terms associated with sustainable investing.
Regulatory changes are being introduced around the role of the adviser, with a requirement that clients must, during the suitability questionnaire, have ESG exposure mentioned to them.
John David, head of Rathbone Greenbank investments, says the changes to the suitability rules are likely to lead to “significant” inflows into the ESG sector in the years ahead.
That rule around suitability is being introduced at the EU level and may change as a result of the current negotiations between the EU and the UK over their long-term trading relationship.
Cathrine de Coninck-Lopez, global head of ESG at Invesco, says that if clients have to be asked if they want an ESG product then “more will say yes” and this will help demand for portfolios.
A standard law of markets is that if an asset class becomes deeply fashionable then the increased volume of cash chasing the same assets means the price of those assets will rise, and so become less attractive as investments in the future.
Mona Shah, ESG investor at Stonehage Fleming, says her focus is on finding “the good companies of tomorrow, many of which are not the good companies of today. Today they are averagely priced”.
Energy entropy
Patrick Thomas, who heads up the ESG service at Canaccord Genuity Wealth Management, says: “There tends to be an element, more in the passive ESG area, of mission creep, where for example, the Social Responsible Index has oil companies in it. Generally I don’t see the best performing active ESG funds stretching the limits of what ESG is.
"Thematic funds are a good way to keep a manager honest, and it is governments who are driving the policy right now, and the funds follow that.”
He doesn’t believe there is generally a bubble in ESG assets, though, he is wary that some of the renewable energy assets are moving towards valuations that may look like a bubble.
David Czupryna, head of ESG at Candriam, argues there is no sign of a bubble “unless you only use the narrow definition of ESG as environmental and climate change assets”.
Some fund managers are hopeful that regulation which clarifies the terminology will be introduced.
Greg Mullins, head of sales at Rathbones Unit Trust Management, says ESG is an area which is growing rapidly, with changing investor sentiment and appetite being met with almost weekly launches of ESG investment products and solutions.
"On top of this we have ongoing regulatory change which will ensure this becomes critical in the advice process, with all clients having their personal values and preferences explored, discussed and catered for," adds Mr Mullins.
"As with any new or rapidly growing area there will be confusion as investment groups rush to be involved regardless of their strengths, trying to appeal to the widest possible audience. This will fuel confusion and make research, recommendations and genuine like-for-like comparisons extremely difficult.
