ESG – environmental, social and governance – is increasingly at the forefront of shareholders’ minds.
Sustainability is perceived as not only good for the planet but also for broadening the scope of diversification within portfolios.
The trend has been a reflection of greater awareness of the effects of climate change, the vagaries of corporate behaviour, the fall-out from the 2008 financial crisis and the growing influence of millennial investors.
Now the pandemic has further galvanised this shift in direction.
It seems all of us have become that bit more appreciative of things we’ve hitherto taken for granted, and more engaged with the dangers global warming represents for the human race.
Sustainable investing is evolving in parallel. Consumer demand is impacting its profile and appeal.
Unsurprising then that funds are joining the cause.
According to Morningstar data, 256 repurposed or rebranded as sustainable in 2020, up from 179 the year before, while after just three months of 2021, the number was already past 120.
Sustainable trends include improving the efficiency of energy use, improving the management of water, increasing electricity generation from renewable sources, making transportation more efficient, improving the resource efficiency of industrial and agricultural processes, recycling, healthcare and healthier foods.
But, how do you measure ESG?
Individual funds have their own rating systems.
Speaking to FTAdviser, Antony Champion, at Brewin Dolphin, said his company tended to divide ESG investments into exclusions (funds that seek to exclude companies involved in tobacco, controversial weapons, thermal coal, gambling, and adult entertainment); leaders (funds that are industry leaders in integrating ESG factors into investment decisions and stewardship activities); and impactful (funds that invest in companies which contribute positively and measurably to social and/or environmental challenges).
Similarly, regulation has emerged from the EU that centres on a system of numbers, with funds that enjoy the highest nine rating being deemed as having holdings which are all ESG-compliant. A rating of seven indicates a portfolio is in aggregate ESG compliant and a rating of six that ESG considerations are part of the fund selection process, though the product is not an ESG mandate. Post-Brexit, this does not apply to the UK but there are indications we may adopt the blueprint or something close to it.
Perhaps the other major issue for ESG investors is that while they feel better about themselves for taking a stand, they still want to see robust returns.
Thankfully, it is no longer the case that you must sacrifice performance to invest sustainably.
So, to take just one example, since launch in 2001 to this May, the Liontrust Sustainable Future Managed fund has returned 257.8 per cent to investors – some 100 per cent more than the sector average – with every investment based on identifying well-run companies best placed to capitalise on the key structural growth themes shaping the global economy, sustainable credentials, good fundamentals, and attractive valuations.
Fidelity says that actively engaging with companies, rather than simply excluding those that do not comply with specific criteria, is the best way to achieve higher shareholder returns.
Large fund managers are speaking out publicly. The chief executive of BlackRock, one of the world’s largest asset managers, writes a public letter to the bosses of publicly traded companies each year to lay out the behaviour that it expects from them.
The hope is that ESG excellence will be viewed as another barometer of company quality.
Societal changes have resulted in an unprecedented rise in appetite for sustainable investing in the past five years.
There now appears to be a self-perpetuating momentum with the public more engaged and providers keen to participate.
It seems sure to continue.