More than half of respondents think we will shift to greener business practices.
- Managers representing over £30 billion sustainable assets under management share their views
- ESG considerations will, in time, be integrated into all investment decisions say most fund managers
- Two fifths believe this will happen in the next five years, and one fifth think between five and ten years
- More than half believe Covid-19 will accelerate a shift to more sustainable and socially responsible business practices
- Europe expected to lead a green recovery, with technology, renewable energy, healthcare and industrials picked as sectors likely to drive change
As the ‘Grow Back Better’ campaign for a green economic recovery from the Covid-19 turmoil continues to gain traction, how do fund managers view efforts towards a more sustainable future?
Over the last year, the fund management industry has done much to try to demystify sustainable and responsible investing, which is very much welcomed. But will it all be a footnote in history as the asset management sector evolves and responsible investing accelerates into the mainstream?
Interactive investor, the UK’s second largest direct to consumer investment platform, has published a poll of 21 asset managers in collaboration with SRI Services, a specialist independent company devoted entirely to advancing retail Sustainable and Responsible Investment.
Some of the world’s largest asset managers as well as UK boutique investment houses responded to interactive investor’s survey. Collectively the respondents represent over £30bn of sustainable and responsible assets under management.
The green recovery and green tech
The research found that more than half of fund managers believe that the coronavirus pandemic will significantly accelerate a shift toward more sustainable, green business activity, whilst over one third thought it would ‘somewhat’ contribute. Fewer than one fifth thought this is unlikely to instigate change.
Countries in the European Union and the UK are cited as the regions that are likely to lead a greener and more sustainable economic recovery, while technology, renewable energy, healthcare and industrials are respondents’ pick of the sectors that are likely to drive change.
Hamish Chamberlayne, Head of Global Sustainable Equities at Janus Henderson Investors and Portfolio Manager of the Janus Henderson Global Sustainable Equity and Institutional Global Responsible Managed strategies; says:
“The next 10 years will be a decade of clean energy and electrification. We’re likely to see breakthroughs in battery technology and widespread adoption of electric vehicles. It will be a decade of digitalisation and hyper connectivity which will enable new ways of organising our economies and promote greater efficiency and circularity across multiple industries.
“In fact, digitalisation is one trend that we see accelerating and we have many investments exposed to this across business productivity, communication, health, entertainment, infrastructure and connectivity. The resilience of the digital economy, with many companies seeing increasing demand for their services in this crisis, has served to underline the idea that many people and businesses can lead lower carbon lives. The whole point of digitisation is that it enables greater productivity and more efficient use of our precious natural resources.
“We see a close link between sustainability, innovation and growth.”
Do the global giants of asset management hold the keys to sustainable investing – or is it the US and China?
Whilst global giants and UK boutiques each participated in the survey, one anonymous respondent said that “I believe that the leading US asset managers (Vanguard, Blackrock, Fidelity) hold the keys to making responsible investing truly mainstream, due to their weight.”
However, one anonymous commentator from one of the world’s largest asset managers believed that “US regulations and Chinese approach to ESG will also matter and weight heavily on the shape of Sustainable Investing.” This is something that has since started to play out, with China recently announcing that China aims for ‘carbon neutrality’ by 2060.
The prevailing view is that responsible investing will become mainstream. Over half of respondents believe the industry is very likely to embrace and integrate sustainable and responsible investment practices so that there is no longer a distinction between sustainable and non-sustainable investments. A third think it the industry is ‘somewhat likely’ to embrace and integrate sustainable practices. Almost two-fifths believe this is likely to happen within the next five years, with just under one fifth anticipating between five and ten years.
Camilla Ritchie, who has led on the 7IM Sustainable Balance Fund since launch, says: “We are actively addressing how we can integrate ESG considerations into all our investment decisions. Whilst 7IM have managed a sustainable fund for more than 13 years, it is only more recently that ESG has become a primary focus across the fund range and within the firm. It seems odd to be looking at this process at a time of global crisis over COVID 19, but in a funny way this has given impetus to our integrating ESG across 7IM as the strong performance of sustainable investments and focus on culture and social interaction has made us realise how important ESG is – not only in our investing and in our relationships within 7IM, but with our clients and other stakeholders.”
Nick Scullion, Director at Foresight Group and Head of Foresight Capital Management, says: “Sustainable investing has reached a tipping point in the public consciousness and fund managers have a responsibility to act as responsible stewards of their investors capital. We consider sustainability due diligence to be of equal importance to traditional financial due diligence.”
Mark Brennan, Head of Investments at Foresight Capital Management and Lead Fund Manager for the FP Foresight UK Infrastructure Fund and FP Foresight Sustainable Real Estate Securities Fund says:
“I think the connection between sustainable practices and long-term financial performance will become increasingly recognised by fund managers. Capital markets will, over the long term, punish companies with poor sustainability practices and outcomes.”
George Latham, Managing Partner, WHEB Asset Management, says: “In my view the growth and adoption of sustainable and responsible investing will continue to gain momentum following the Covid-19 crisis. However, I believe it will be a very long time before the distinction between ethical and non-ethical investments disappears, if ever.”
David Harrison, Fund Manager, Rathbones, says: “We anticipate strong growth in the sustainable investing industry within asset management - driven by client demand, but also regulatory requirement.”
When it comes to how companies treat employees – brought into the fore most recently via the Boohoo scandal – over two fifths of respondents think we are likely to see more companies focusing on good employment practices, equality, and strong governance more generally, as part of the overall recovery, with over half thinking it is ‘somewhat likely’.
No need to sacrifice returns
Ed Heaven, Deputy Chairman of the ESG Committee, Montanaro Asset Management, who took part in the survey, says: “2019 was the year that the world truly woke up to the climate crisis. Climate protests became global, multiple countries introduced net zero carbon emissions targets and more asset owners and asset managers incorporated objectives aimed at tackling climate change into investment strategies. 2020, meanwhile, will be remembered as the year of the global health crisis".
"Global problems, such as these, have increased investors’ desire to allocate capital to companies providing the solutions. This is unlocking a number of exciting growth opportunities. As such, we do not think that investors need to compromise on investment returns when allocating to "impactful" companies. This means that over time, and with good performance, sustainable investment funds can form core parts of mainstream investment strategies.”
Better ways of working
Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International says: “Covid-19 has brought ESG issues to the fore with unexpected urgency. Chief among them has been the rise of “S”, with a much greater focus on employee welfare and the societal responsibility of businesses in a global crisis. We believe that engagement is crucial to our role as stewards of client capital and, within that, to our active investment and ESG rating process - our Sustainable Investing team works closely with Fidelity analysts and portfolio managers when engaging with companies. It also forms part of our responsibility to run our own business in a sustainable way.”
Not everyone is optimistic
One respondent, who wished to remain anonymous, says: “Within the context of how clients access 'sustainable' or 'responsible' investment vehicles, there remains notable ambiguity, subjectively and greenwashing in this space.
“Terminology and tags are exchanged interchangeably, with little consistency between asset managers, making it very difficult for clients to unpick the options available to them. It feels that significant education is required here to ensure clients (and advisers) understand the varying approaches with the broader umbrella of responsible investing. ESG is widely misunderstood and varies notably from an 'ethical' approach that many are more familiar with. Few understand other approaches such as 'thematic', 'impact', or 'active engagement'.
“There also seems to be a notably 'lean towards the E', with climate front of mind for many. This naturally plays down the role of S and G in many products coming to market.
“It feels like the regulator has a role to play in sharpening these definitions, to ensure asset managers are not being creative with their messaging versus their actual ESG capabilities.”
interactive investor view
Moira O’Neill, Head of Personal Finance, interactive investor, says: “Over the last year, interactive investor has made it our mission to demystify ethical investing and make it easier for investors to navigate. We launched our ethical investing long list, broken down into three ii ethical ‘ACE’ styles: Avoids, Considers, Embraces, last year. We also launched the UK’s first ethical rated list, and this year, our ethical portfolio.
“Ethical investing is still chronically underrepresented in platform best buy lists, although Baillie Gifford Positive Change broke into the top 10 most bought funds on the interactive investor platform this summer. We would like to think that ethical investing will become mainstream in the coming years as fund management groups realise that it does not have to compromise returns, and can, in fact, enhance it. But there will always be judgement calls to be made, and doing your homework is key. One person’s ethical stock is another person’s sin stock, and this applies to fund managers and index providers too.”
Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The fact that 52% of managers believe that ESG considerations will be integrated into investment processes as standard reflects how far ethical investing has come from the recondite niches of the asset management industry and the scale of consumer demand for investments aligned to their moral beliefs.
“However, not everyone is convinced and even some of the shrewdest investors believe there is still a lot of work to be done. But in the words of Bob Dylan, ‘times they are a-changin’. Ethical concerns from plastic waste to social injustice have emerged are now form part of the zeitgeist, championed by the likes of Greta Thunberg and David Attenborough. In other words, the public is arguably less tolerant to corporate malpractice and other ESG issues now than ever before.”
Julia Dreblow, Director, SRI Services says:
“There is no doubt things are moving incredibly fast in the sustainable, responsible and ethical investment markets (referred to here as ‘ethical’). Although unwelcome, Covid has effectively turned up the speed on this treadmill by exposing societal and business vulnerabilities - and the fact things can change incredibly fast.
“Major investors, finding themselves at the sharp end, increasingly recognise that if they get left behind in the race to improve ESG standards they will fall behind their peers. Their focus is rightly on climate change - and the ‘race to zero’ - as the climate crisis is a massive systemic risk. But Covid has brought social issues almost ‘neck and neck’ given some of the dreadful employment practices that have been making headlines. Governance is of course the glue that holds this all together because without sound company management investors will factor in likely underperformance and punish companies accordingly.
“Responsible investment is all about fund managers behaving like true owners, encouraging businesses to up their game, whilst strictly speaking ‘ethical’ talks to personal values – giving clients the option to reflect the full range of their personal likes and dislikes into fund selection. What Covid has done, as these fund managers clearly recognise, is to shine a whopping great spotlight on this whole area… and not a moment too soon, in my view.”
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