There were significant inflows into ESG (environmental, social & governance) and sustainable funds, alongside a number of new launches during 2020, as investor interest grew amid more favourable market conditions for the strategies. However, as 2021 approaches, will the trend continue. 
While interest has been buildings in ESG and sustainability investing for some years now, the trend was accelerated by the Covid-19 pandemic, with the growthier stocks often held by the strategies benefiting from coronavirus conditions as awareness of environmental and social issues also grew.
Indeed, this year’s Schroder UK Financial Advisory Survey found that half of financial advisers polled expected client attitudes to sustainable investment to change as a result of the coronavirus crisis.
In addition, some 74 per cent of financial advisers now explicitly consider ESG factors as part of their fund selection process, up from 43 per cent in 2019.
There has been a marked increase in inflows into ESG strategies during 2020 compared with previous years.
According to data from global funds network Calastone, there have been inflows of £6.1bn to ESG strategies this year – £4.2bn in equity strategies alone - the highest on record. In comparison, in 2019 – the previous high saw £1.8bn invested across all ESG strategies.
Source: Calastone
This momentum of increasing inflows into ESG strategies will likely continue into next year, according to Rob Morgan (pictured), pensions and investments analyst at Charles Stanley Direct.
He said: “Investors are becoming more aware of social and environmental issues. And at the same time, they are realising that investing with these in mind is not necessarily an impediment to performance, and could in fact help.”
The ability to generate outperformance while investing in more environmentally and socially friendly outcomes is just one reason behind increased ESG inflows, according to Tom Sparke, investment manager at GDIM.
Alongside the strong performance of the quality-growth assets typically held by these strategies, Sparke said forthcoming regulation will mean financial advisers and asset managers have to consider ESG and their approach to investing.
“There is, as evidenced by the new Mifid regulations on ESG factors also being driven by the regulator, and in the growing awareness of the populous,” he said. “I, therefore, think that there will be a continued move toward these funds in 2021.”
While market experts agree that ESG and sustainability investing will continue growing in the long term, we might see a short-term reversion of this theme while markets go through a ‘recovery stage’.
Indeed, with a Covid-19 vaccine now being rolled out across the UK and other parts of the world making a return to more normal conditions possible, experts are beginning to forecast a recovery period for markets during 2021.
As such, this could mean a slight decrease of inflows into ESG options short-term as investors seek more cyclical options to hold during the recovery, assets which do not normally fit into ESG mandates.
Adrian Lowcock, head of personal investing at Willis Owen, said the rise in inflows during 2020 – while part of a longer-term trend – has been driven largely by the pandemic. However, if that is taken out of the equation they could start to moderate.
He explained: “The speed of flows will most likely slow in the short term and indeed there could even be a reversal of this trend as some investors rotate into other areas of the market such as cyclical recovery stocks.”
Looking from the products side and there have been many new ESG and sustainable launches this year and this is something Lowcock said he expects to continue, as fund houses look to fill the ‘ESG gaps’ in their product offering.
Lowcock (pictured) added that while the amount of ESG investment options has grown this year it still makes up a relatively small part of the market.
Indeed, according to the Investment Association, responsible investment funds make up just 3 per cent of funds under management.
“I think we are still some way off saturation point and indeed ‘peak-ESG’,” Lowcock said. “The amount of money in these funds remains small compared to the whole market.” 
So far, most ESG products have been launched in the global market equity space.
But Joe Wiggins, manager of the newly launched Aberdeen Standard Investments MyFolio Sustainable range, said that going forward he expects to see new ESG product launches in other areas of the market.
“It’s much harder for example to find a high yield bond fund with sustainably or ESG characteristics or a corporate bond fund,” he explained. “That will change through time, I think that there will be a number of launches in those spaces.”
Wiggins said there are also likely to be ESG and sustainable launches in areas “which you wouldn’t necessarily think were a natural fit”, such as in derivative-heavy, absolute return strategies.
“I think that the momentum will continue,” he said, “and it will broaden as well.”
There are already signs that ESG and sustainable investing is becoming more mainstream as the UK government announced the launch of its first ‘green gilts’ earlier this year, as part of its commitment to net zero carbon and to support the economic recovery from Covid018.
These gilts are an example of the different ESG launches markets should see coming through in the future, according to Wiggins.
Nevertheless, with ESG and sustainable product launches set to continue it becomes very important to have a clear understanding of the definitions used by asset managers, said Charles Stanley Direct’s Morgan.
“My point here is that investing with ESG in mind doesn’t make you a ‘sustainable’, ‘responsible’ or ‘green’ investor – it’s how you apply the framework,” he said. “We’ll see a lot more distinction of this going forward and the development of a label or kitemark for funds that go beyond basics and invest in a truly socially responsible way through a variety of techniques and philosophies.
“What we can be sure of is that no fund managers will be ignoring ESG,” Morgan added. “It will increasingly be seen as an essential part of any investment process, so all fund managers will be disclosing their positions on ESG and how they seek to use it.”
He continued: “This trend will play out over 2021 and beyond and I think we will see a blurring of the ESG picture, in that, all funds will be using an ESG process… to an extent.
“So, yes, there will be more launches, but also more existing funds demonstrating their ESG credentials."