The incredible rise of ESG investing and why it is here to stay | Advisers | Vitality (2024)

Following the launch of our EnVIRO fund range, we investigate the unstoppable rise of ESG and how financial advisers are helping their clients to invest in way that is both sustainable and good for society.

Money has poured into ESG (Environmental, Social and Governance) funds since the onset of Covid-19, with total global investments in ESG hitting $1 trillion (£705 billion) for the first time last year, according to industry figures.¹

Here in the UK, advisers have also seen a big increase in demand for ESG funds, or “sustainable investments”, from their clients. “Appetite for ESG funds has grown significantly over the last 12 months,” said Francis Gill, founder of adviser firm Humboldt Financial. “In the past, the portfolios we created for clients only really included ethical funds if they specifically asked for them. Now, most of our portfolios include around 40% of ESG funds.”

One reason for ESG’s newfound popularity is a shift in investment rationale during the pandemic. “People are still looking for the best returns,” said Julian Strauss, senior financial planner at Bigmore Associates. “But there has been an aligning of the planets in this regard because while people had to accept they would probably receive lower returns if they invested in ESG funds in the past, they can now earn the same returns in investments of this kind. In other words, you don’t have to sacrifice performance to invest with a conscience.”

Here, we take a closer look at the rise of ESG investing and how advisers are responding to burgeoning client interest in the area.

What is ESG investing?

ESG investing involves supporting companies that work to make the world a better place, be that societally, environmentally or through corporate governance. To qualify, companies must score highly on environmental, social responsibility and corporate governance scales set by independent bodies and researchers.

While one might earn its place due to its main activity – producing clean energy, for example – another could be eligible thanks to its irreproachable corporate governance policies on issues such as working towards net-zero carbon initiatives.

When it comes to ESG funds, there are two main approaches open to fund managers. One of these involves screening out companies in sectors that do not fit ESG principles, such as armaments and oil and gas.

It’s an approach that has proved successful over the last 12 months or so due to restrictions imposed to curb the spread of Covid-19. “ESG funds have been able to produce better returns during the pandemic because they have more exposure to sectors such as technology, and avoid polluters such as airlines and oil companies,” Strauss said.

However, while some ESG funds choose to invest into a particular trend that is likely to initiate positive change, others invest in companies with a less-than-spotless ESG record in order to use their power as shareholders to nudge company policy in the right direction. “Shareholder voting rights can be a driver of positive change,” Strauss added. “After all, if you’re not at the party, you can’t have your say. But for clients to feel comfortable investing in funds of this kind, it’s important they understand how they work.”

Why is ESG investing so popular now?

As we’ve explored, a shifting mindset is one of the major reasons ESG investments are proving such a popular choice at the moment, alongside higher performance of key sectors. “The Covid-19 pandemic has reinforced the ESG-friendly technology sector, pushing valuations higher, especially for the big US companies,” Strauss said.

Better returns and changing investor behaviour are not the only driving forces, however. Activity around COP26, as well as emerging climate change legislation and government regulation have played their role. As has greater awareness generated by campaigns such as Extinction Rebellion, Black Lives Matter as well as documentaries like Seaspiracy and Blue Planet; all movements which have been catalysed by the pandemic.

Moving away from the term “ethical” has also had an impact, in Strauss’ opinion. “What is ethical to one person can be unethical to another, so it’s a very subjective area,” Strauss said. “Changing the emphasis to Environmental, Social and Governance has helped to make investments of this kind more appealing.”

As ESG investments become more attractive to investors, companies are also seeing the benefits of brushing up their social, environmental and corporate governance policies – pushing these issues up the agenda for many publicly listed organisations. “We are seeing companies being rewarded with higher share prices when they take ethical decisions,” Strauss said. “It’s a powerful argument for doing better.”

On the flipside, however, it is encouraging unscrupulous companies – and fund managers – to “greenwash”, or put a deceptively sustainable spin on their activities, to please both investors and governing bodies. That’s why the government has urged the Financial Conduct Authority to crack down on the so-called “greenwashing” of financial products.²

How can advisers help their clients navigate the ESG sphere?

While a growing number of investors like the idea of ESG investing, the challenge for financial advisers is building it seamlessly into their advice processes. And with issues such as climate change showing no signs of disappearing, advisers also need to be prepared to educate their clients about the ESG sphere.

“I’m not sure the average investor fully understands ESG investing,” Strauss said. “For the most part, they just want good, guilt-free returns. The adviser’s role is therefore to understand what is important to a particular individual and educate them in the best ways to achieve this.”

Getting to grips with clients’ beliefs and convictions – as well as their goals and attitude to risk – could become a bigger part of the adviser’s role as a result. “For the moment, most people seem to want to take a blanket approach to ESG by only investing in funds that screen certain sectors, such as tobacco and armaments,” Gill said.

“But as investors’ demands become more sophisticated, there will be more work for advisers to do going under the bonnet of ESG funds to see why managers are doing what they are doing.”

The EnVIRO fund range

In June, VitalityInvest launched its new EnVIRO fund range, consisting of five ready-made ESG focused funds that help make integrating ESG into existing advice processes seamless.

“Each one of our EnVIRO funds is made up of index-tracking building blocks that focus on sustainable outcomes,” said Justin Taurog, managing director of VitalityInvest. “They feature ongoing governance at their core and cater for a wide variety of risk profiles with Gold standard risk ratings by Dynamic Planner. All this gives you the flexibility you need to meet your clients’ preferences, coupled with the ease and convenience that ready-made solutions offer.”

Vitality Chief Sustainability Officer Deepak Jobanputra added: “In these changing and uncertain times, one highly positive outcome has been the way in which people have come together to work for the good of society, whether that’s removing plastic in oceans, achieving greater diversity and inclusion or reducing our carbon footprint.

“This desire to be a force for social good is something we’ve been doing through our Shared Value modelever since we were established in 1997. And it’s something I’m extremely proud of. I personally have been helping to bring Shared Value to the life insurance market for over ten years.”

“So I’m very excited to be given this opportunity to guide Vitality and VitalityInvest on its journey to provide even more people with the opportunity to enjoy a more sustainable future.”

Find out more about our EnVIRO find range and how to help your clients invest in a more sustainable future.

Sources:
1. European Sustainable Funds Landscape: 2020 in Review, Morningstar, February 2021: https://www.morningstar.com/content/dam/marketing/emea/uk/European_ESG_Fund_Landscape_2020.pdf
2. Treasury Committee publishes “Net Zero and the Future of Green Finance” report, Treasury Select Committee, April 2020: https://committees.parliament.uk/committee/158/treasury-committee/news/154672/treasury-committee-publishes-net-zero-and-the-future-of-green-finance-report/