There is no doubt that there is a growing interest in environmental, social and governance (ESG) investments, including in the passive fund space.
Whether it’s documentaries such as Blue Planet, or the politics around the Paris Agreement on climate change, the Extinction Rebellion protests or 16-year-old schoolgirl Greta Thumberg sailing on an eco-friendly yacht to speak at the next UN summit in New York, public consciousness has awakened to the very real threats facing our world. Investors want to make ‘green’ decisions, because they are realising their cash can make a difference and give them a voice – whether that’s relating to the company’s carbon footprint, executive pay schemes or workforce diversity.
Interest in this area is growing to the point that institutional investors are not only allocating billions of pounds to ESG solutions, but they are even choosing ESG-themed portfolios as a default. Recent examples include the £11 billion Co-op pension scheme choosing a Future World default fund from Legal & General Investment Management, and Aviva launching a default ESG scheme for its workplace pension. The largest pension scheme in the UK, NEST, has recently divested from tobacco – the scheme said it would take two years.
This growing traction is also reflected in the ETF space. An ETFGI report found that global ESG ETFs/ETPs assets increased close to 30% in 2018, accounting for $7.6 billion in net new assets. This compares to the overall increase in ETF and ETP assets of 4.6%.
Europe is starting from a lower base but interest is also growing significantly. Morningstar data shows there are 72 ESG ETFs in the region, with EUR 13.5 billion in assets. Exactly two years ago there were only 36 of these funds with less than EUR 5 billion in assets. These ETFs cover areas like fixed income, including corporate and government bonds. However, the doubling of the number of ESG ETFs does not mean there is a huge choice for asset allocators, as the vast majority of the funds are in developed market equities.
So who is investing in these products? Contrary to the US, the majority of ETF assets are still held by institutional investors.
However, in the ESG space, the data shows this is slowly changing. The Global Sustainable Investment Alliance’s 2018 review shows that the proportion of sustainable investment assets held retail investors versus institutional investors has risen from 20 to 25% in the two years to 2018. This is no surprise given younger investors’ interest in ethical issues, and investment apps like Nutmeg and MoneyBox, that are powered by ETFs, offering ESG-focused portfolios.
Although increasing interest and demand in this space is surely a positive step, there are big hurdles which remain in the ESG space, which these blogs will address going forward. They include a lack of data from underlying companies to create enhanced ESG-focused indexes and products; the sourcing of data being used as an excuse by fund shops for charging their clients more to make ethical choices; a lack of consistency when it comes to regulation and definition of ESG as a category; and as mentioned, a lack of appropriate funds to make up diversified and risk-appropriate ESG portfolios.
There are also some myths and misconceptions to address, such as ESG negatively impacting performance. As these myths are busted as the data and the products improve, perhaps the regulator will not take so kindly to financial advisers and fund houses who do not offer genuine client choice.
There is a long way to go before ESG products and the ideas behind them can step up to the plate and fully meet the ever more sophisticated demands from clients, retail and institutional alike. Our new Earth portfolios, launching soon, are one small step for the ESG landscape, and one giant step for our firm and our clients.