As a concept, sustainable or ESG investing began with engagement, with asset managers actively engaging with companies and voting down bad governance decisions. This eventually morphed into what became known as ‘exclusion strategies’, where stocks exhibiting specific characteristics would be removed from the universe of investable companies.
It is in these two strategies where the significant majority of UK assets remain, according to ESG data provider UK Sustainable Investment and Finance Association (UKSIF).
In a report published last year, the body said €2.6bn (£2.3bn) was invested in engagement strategies at the end of 2015, an increase of 53 per cent from 2013. There is €1.9bn invested via exclusion strategies – with the space seeing assets under management (AUM) almost triple in the two years.
UKSIF’s figures also show strong growth in other areas, with sustainable funds seeing AUM almost double, and impact investing nearly quadruple. Momentum is building, in particular among retail investors. Data from the Investment Association (IA) shows ethical funds saw AUM grow from £10.7bn to £13.4bn in the year to April 30. However, their percentage share of overall assets remains anchored at 1.2 per cent.
Several fund groups have also found their feet – with an ESG overlay becoming a core part of Stewart Investors’ offering, for example. Hermes and Royal London Asset Management are other firms known for providing ESG and sustainability-related investment strategies.
Fund launches addressing demand in the sustainable universe are increasingly commonplace, even among wealth managers who have begun designing their own fund of funds and model portfolio strategies to meet client needs. Supporting this demand is a better understanding among retail investors that investing in sustainable, ethical and ESG funds does not necessarily come at the cost of performance.
David Gait’s Stewart Investors Worldwide Sustainability fund, for example, has doubled investor money in five years, compared with a 75 per cent gain in the MSCI World index. Similarly, the Premier Ethical and Kames Ethical Equity strategies have outperformed the FTSE All-Share by 53 and 17 percentage points, respectively.
The market beta has also held up relatively well. Looking at index provider FTSE’s range of ethical and ESG indices, FTSE4Good, shows that both the UK trackers matched their general benchmarks. The European index underperformed by only 5 percentage points in the short term. But over five years the European and global funds underperformed by 13 and 15 percentage points, respectively.
UKSIF says ESG, socially responsible and sustainable investing has exploded in the UK, with current AUM undoubtedly higher in the years since 2015.
The space is expected to grow further as younger investors enter the market. Funds that entered the retail market while ESG and sustainable investing was merely a topic for the pension fund trustee are now starting to benefit.
THE PICKS
Premier Ethical
This £151m UK equity strategy run by Chris Wright sits in the IA UK All Companies sector and is primarily focused on capital appreciation. However, Mr Wright’s stock selection is bound by Premier’s ethical committee’s criteria, which provides rules on sectors to avoid and also those to target. The fund cannot invest in tobacco, pornography or weapons, but can target companies improving ethical behaviour. The vehicle is first quartile over all time measures up to five years, providing a three-year return of 32 per cent versus the sector average of 23 per cent.
Liontrust Sustainable Future European Growth
Managed by Neil Brown and Peter Michaelis, this £185m former Alliance Trust Investments fund sits in the IA Europe ex UK sector and operates a growth strategy. The duo’s stock selection is dictated by the firm’s environmental and socially responsible criteria. Stocks are judged on having “strong environmental or social trends”, based on climate change, quality of life, sustainable consumption and risk management characteristics – the latter of which refers to ESG. The fund is first quartile over three years and has returned 46 per cent, compared with an average of 40 per cent by the sector.
EDITOR’S PICK
Stewart Investors Worldwide Sustainability
Manager David Gait has won many plaudits, most recently demonstrated by Stewart handing him the flagship Asia Pacific Leaders fund, which has also now shifted to a sustainability strategy. Mr Gait has managed this £408m fund since 2012 and was joined by co-manager Nick Edgerton in 2014. The global equity vehicle picks stocks that “benefit from, and contribute to, the sustainable development of the countries in which they operate”. Firms are judged on their focus on positive sustainability impact, inclusion of ESG and engagement. Over three years the fund has returned 59 per cent versus an IA Global sector average of 42 per cent.
