Skip to the content

2020 has been a watershed year for ESG funds – but what does the future hold?

14 August 2020

Trustnet asks sustainable fund managers and market experts what the future looks like for ESG investment after a spike in interest.

By Eve Maddock-Jones,

Reporter, Trustnet

Interest in ESG (environmental, social and governance) investment has been building for a number of years, but 2020 has proved to be a turning point in converting interest into actual inflows.

The latest edition of the Calastone Fund Flow Index (FFI) found that July had record inflows of £362m into ESG equity funds, despite lacklustre demand for active funds in general.

Global funds network Calastone also found that over the last year one-third of inflows into global funds has ended up invested in ESG strategies. This was even more impressive given that the ESG category is far smaller than the general global equity space.

Alongside this swell of investment into ESG options, the sustainable strategies have proved that they pay off when markets get tough.

Research carried out by Trustnet found just over 40 per cent of ESG and sustainable funds made top-quartile returns in the first half of 2020, with the average ESG fund outperforming its peer in the IA Global sector.

Stephen Freedman, head of research and sustainability of thematic equities at Pictet Asset Management, said: “We are seeing a tipping point, which is the result of an increasing awareness of the underlying environmental, social and governance issues, a realisation that these issues matter for investment outcomes, and more broadly speaking an understanding among end investors that ESG has shifted from being a niche to a sophisticated and innovative segment in the investment industry.

“There had long been a concern [about how] ESG might weather a significant market downturn. The first quarter of this year has laid those fears to rest with most ESG strategies outperforming traditional strategies. That has certainly been an additional catalyst.”

This ‘tipping point’ refers to the coronavirus crisis highlighting the social (S) element of ESG, increasing awareness and accountability of people, and especially corporations’, actions in tumultuous financial and social periods.

Having established that 2020 has been a watershed year for ESG investment in terms of gaining popularity and dispelling the idea that investing sustainably means sacrificing returns, Trustnet asks what is the outlook for ESG investing?

Both David Harrison of Rathbones and Ketan Patel from EdenTree Investment Management said they expect this acceleration in ESG to continue long-term.

Patel (pictured), co-manager of the EdenTree Amity UK and EdenTree UK Equity Growth funds, has been a sustainable investment fund manager for almost 20 years and watched this rising trend build from an outlier to today’s more popular option.

He said: “It’s probably the most exciting time ever I think to be an ESG manager. And it’s nice to be at the front of the vanguard, but now it’s quite broad and deep.”

On the outlook for ESG Patel said: “I’m very positive, and maybe you’d expect me to say that after 20 years of doing this, but I think that there are a couple of long-term trends.”

One of those being that ESG is, by its nature, actively managed and is not an area which can easily be approached passively as it needs constant attention and review to ascertain which companies are meetings sustainability goals.

“Obviously we saw a ‘passive-isation’ of mainstream funds but the one area which you cannot pacify is ESG,” the manager said.

“You need that deep knowledge of companies and how they work to beat the benchmark.”

Other long-term trends which will progress beyond 2020 the coronavirus is the faster adaptation to renewable technology, an area David Harrison said he sees “very attractive” opportunities in, especially as more companies adopt a sustainability focus.

Harrison (pictured), manager of the Rathbones Global Sustainability fund, said: “We expect the crisis to accelerate sustainability trends across a number of industries.

“Within the energy space this means a faster adoption of renewable technology, which is being increasingly sustained by government supported infrastructure plans.”

Actions such as the European Union’s recent Coronavirus Recovery fund, which states that 30 per cent of the stimulus must be spent on actions purely tackling climate change and places a large focus on renewables infrastructure.

“Within the technology space, we are seeing an acceleration in digital trends which has significant positive impact in terms of efficiency and lower emissions,” Harrison added.

One concern which has cropped up during the ESG rally is the threat of continued ‘greenwashing’.

Greenwashing is giving a false impression of a company’s environmental and sustainable practices and making them appear better than they are. This can be applied to investment funds and trusts which are labelled as ESG but hold unsustainable or environmentally damaging stocks.

Simon Hildrey, chief marketing officer at Liontrust Asset Management, described greenwashing as “a troubling trend”.

To ensure greenwashing doesn’t capture ESG intended inflows, a closer inspection of the funds from the investors is required to check the true ESG credentials of a fund manager.

Hildrey said that there are five key attributes investors can use to test a manager’s true sustainability.

The first is transparency. “Genuinely sustainable fund managers should be transparent about how they invest, as well as being open to be challenged,” Hildrey said.

Second consideration is experience and resource, then knowledge and ongoing training, activism and finally evidence.

“Ultimately, you are looking for all this knowledge and experience in sustainability being applied to investment decisions – giving meaningfully different exposure compared to more conventional funds,” Hildrey said.

Pictet’s Freedman seconded this adding, that “it’s important to kick the tires on the ESG credentials of investment managers”.

“Understand how deeply committed they are to sustainability and appreciate the extent to which it truly permeates the investment process,” he said.

Greenwashing is ultimately born from the desire to selfishly monetise sustainability rather than actually doing it properly. And with the wave of new fund launches in this space, Harrison said that it is important for investors to understand how the sustainability process works in any new fund.

“Be clear about the company’s heritage in the ESG and sustainable space. There is definitely a risk of the space becoming ‘bandwagonesque’,” he cautioned

Looking ahead at the future of the ESG investment space and Patel concluded: “The next five years are going to be so fascinating just from a social history perspective and how we changed the world. I don’t like that phrase, but what we’ve learnt in the fast six months is that things can change very fast.”

Editor's Picks


Videos from BNY Mellon Investment Management


Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.