Flows into sustainable funds in Europe turning negative for the first time is not the beginning of a long-term trend, an ESG legislation specialist believes.
Investors withdrew $1.2bn (£903m) from such funds in the opening three months of the year, a sharp contrast to the $20.4bn (£15.3bn) they welcomed during the previous quarter at the end of 2024.
This was the first time that flows into such funds in Europe were negative since records began seven years ago. This has led some to question if the backlash against ESG in the US, where money has been pulled from such funds for 10 straight quarters, has crossed the Atlantic.
The outflows recorded at the start of the year were the result of various issues asset managers were facing, said Vernon Dennis, a partner at law firm Howard Kennedy.
“There was an awful lot of pressure on asset managers in the first quarter to respond to geopolitical challenges but also to where value has been seen to be found in the market,” he added.
These pressures included pricing, the geopolitical effects of the US exiting the Paris Agreement and some governments “looking wearily” at their net-zero targets and if they can be achieved.
“You have all of that plus a dividend for defence, with major nations in Europe committing to an increase in defence spending. That is going to have implications on ESG funds, which suddenly look unattractive,” Dennis said.
However, incoming legislation could restore confidence in sustainable investment strategies across Europe and the UK, Dennis told portfolio institutional.
There are two elements to this.
The first is labelling with the aim to reduce greenwashing. “In the short term, there will be an outflow because some funds relabelled themselves,” he said. “Longer term, I see legalisation which provides confidence as to what you are investing in.”
The second element concerns rating agencies in Europe and the UK.
“Businesses promoting their ESG credentials for investment purposes need to rely on rating agencies,” Dennis said. “But the difficulty for investors is relying upon what the rating agencies are saying.”
He added that regulating these agencies has been welcomed by the industry. “It is going to provide more credibility towards ESG credentials and therefore more certainty in the ability to invest in something you believe in,” Dennis said.
The issues here include assessing a company’s ESG credentials despite the many environmental, social and governance issues to be considered. Remember that British American Tobacco was assessed as being AA – the highest rating available.
There have also been issues of companies with high ESG ratings then being accused of greenwashing.
So rating agencies becoming more standardised and having to set out how and why they came to a particular rating “can only provide more credibility to the market”.
Comments