ESG investing trend gains momentum

Underlining this trend, Morningstar earlier this month launched the industry’s first sustainability rating for roughly 20,000 funds based on ESG factors, while Whitechurch Securities recently announced the launch of a range of ethical, discretionary-managed multi-asset portfolios in response to rising interest.

Jon Hale, newly appointed head of sustainability research at Morningstar, says: “Many investors are interested in sustainable investing but are unsure how to put it into practice. Our new rating makes it easier to compare funds based on their ESG attributes. In that way, investors can better determine how to incorporate sustainable investing into their portfolios, or assess the extent to which their investments are upholding best sustainability practices.”

This growing interest can be attributed to a number of factors, including a renewed focus on climate change in the wake of COP21 in December 2015.

But while the biggest shift in recent years has been away from traditional negative screening to positive screening, engagement and impact investing, the range of jargon can be a headwind for investors, with many unclear as to what the terms mean.

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Neville White, head of socially responsible investment (SRI) policy and research at EdenTree, notes: “As an industry we very much tried to develop models to appeal to different constituencies, but in so doing have come up with lots of different terminologies that can be off-putting.”

The sector now seems to be moving more towards the sustainable or responsible investment description, a movement that can be said to stem from a change in pensions legislation at the start of the millennium that obliged pension trustees to review whether ESG risk was material to their pension funds.

“The tweak catalysed a lot of thinking around risk and how non-financial risk can have a large impact on shareholder value or destruction,” Mr White explains.

“Out of that you got a lot of interest in different areas such as thematic investing, which is fairly niche but clearly of interest to investors who want to be at the riskier end of sustainability.”

But the key megatrend remains climate change and the consequences of a transition to a low-carbon economy, including the potential for stranded assets.

Hamish Chamberlayne, SRI manager at Henderson Global Investors, notes: “The big picture is that in the next few decades the global economy is going to transform to a low-carbon economy and it will be one of the biggest investment events of our lifetime.”

He explains: “We have a global economy that is roughly $80trn [£56.3trn] and extremely dependent on carbon, so transitioning to an economy where we are much less dependent on carbon will result in enormous disruption to established industries and geopolitical relationships and how the global economy works. In the next 10-20 years there will be huge risks and opportunities.”

Meg Brown, UK business development director at Impax Asset Management, agrees the COP21 event reawakened interest in climate change, but says the underlying trend is of investors looking for a positive use for their money.

“[The industry] grows each year a bit at a time, and it’s certainly gaining more and more traction,” Ms Brown says.

“There are more and more people making personal decisions about their investments in the wake of the pension freedoms, higher Isa limits, investing for children and more women investing. It is steady growth with strong catalysts, such as COP21.”

Mirova chief executive Philippe Zaouati adds that recent developments have resulted in the responsible or sustainable investment approach becoming more “concrete”.

He says: “Responsible investing is becoming more mainstream. I don’t like this word as it is sometimes a way of accepting a dilution of the concept. But actually it is the contrary, it is more concrete and stronger than before.”

Mr Zaouati notes that while the trend from the old economy to the new low-carbon economy was in motion, the agreement at COP21 “shows this trend is not going to stop. This is the most important thing for investors, they have to take into account this trend is here to stay”.

But John David, head of Rathbone Greenbank Investments, points out that while the Paris Agreement “was a watershed moment in achieving coordinated global action, there is still significant uncertainty as to how it will unfold at the national level”.

Nyree Stewart is features editor at Investment Adviser