With ethical and responsible investing becoming increasingly popular Roger Aitken asks if ESG-themed funds are living up to expectations.
“For ESG-themed funds, it is crucial to view performance with a long-term horizon as some ESG themes can take time to play out.”Fawzy Salarbux, Candriam
Investing along ethical, socially responsible and environmental, social and governance (ESG) lines is no longer within the “domain of the lentil-chewing, sandal-wearing lefties of the 1960s”, as Filip Slipaczek, a three time Chartered Financial Planner, once remarked almost a decade ago.
Today investing in the sector has increasingly caught the attention of institutional and retail investors, even if the definition of ESG itself can prove somewhat cloudy with various terms – ethical, social responsible investing (SRI) and impact investing – often conflated to mean broadly the same thing. This can clearly make evaluation of performance of the sector somewhat tricky.
The term sustainable investing refers to any investment approach that systematically includes ESG criteria in the investment process and/or the consideration of ESG impacts on investors, stakeholders, the environment, society, economy and financial system.
SRI and the emergence of ESG factors have certainly been evolving in recent years. Its myriad forms have long occupied a position at the “intersection of mission and investing,” according to a paper issued by US investment house Neuberger Berman titled ‘The Purpose-Driven Portfolio: Evaluating the SRI Opportunity’ (April 2016).
But whatever terms are applied, if one uses the umbrella term ‘ethical’ or ESG as a catchall for a moment, then one thing is pretty clear: ethical investing and ESG is becoming increasingly mainstream. That said, it still only accounts for a tiny percentage of the overall investing strategy pie.
Taking the retail market for European SRI funds, it continued to expand in 2016. According to Vigeo Eiris, the European corporate responsibility rating agency, there was a 16% increase in assets under management (AUM) last year to almost €158bn (£147bn) over the previous year’s €135bn figure, which was an 8% increase over the previous year.
The latest figure, which was presented in Vigeo Eiris’ 17th edition of the annual study titled ‘Green, Social and Ethical Funds in Europe’ in partnership with Morningstar for the period June 2015 to June 2016, revealed it represented 2% of the overall retail funds market.
The four largest markets in Europe – France, UK, Switzerland and The Netherlands – confirmed their leadership and accounted for 68% of European assets in the space. France was confirmed as the largest European SRI retail market (37% of the total), whilst the UK remained in second place (12%), followed by The Netherlands (10%).
Sector wise, equity funds (46% of the total) still outweigh fixed income funds (30%) and balanced funds (24%) in Europe. However, it was noted that their share has not yet reached the 2007 record of 67%. Yet it is just part of the picture, if institutional funds are examined and the slide rule extended further afield.
From 2014 to 2016 the fastest growing regions globally have been Japan, due to greater reporting and sustainable investing activity by Japanese institutional asset owners, followed by Australia/New Zealand and Canada. This is according to the Global Sustainable Investment Alliance (GSIA), an international collaboration of membership-based sustainable investment organisations.