'ESG Investing' has morphed into a catch-all term for a range of strategies that really incorporate different styles and fundamental differences. However, all these concepts, which originally found their feet among institutional investors, are increasingly creeping into retail investor vernacular. When used as an umbrella term, it covers strategies focused on environmental, social and governance (ESG) factors, impact investing, sustainable-focused stock picking, socially responsible and ethical approaches.
As a concept, ESG investing began with engagement, with asset managers actively dealing with companies and voting against bad governance. This eventually morphed into what became known as ‘exclusion strategies’, where stocks exhibiting specific characteristics would be removed from the universe of investible 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 in 2016, 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) showed ethical funds, another catch-all term, saw AUM grow from £12.4bn to £15.4bn in 2017. Its share of overall assets rose slightly to 1.3 per cent from 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, but many more are beginning to launch products aimed at both retail and institutional clients.
As such, fund launches addressing demand in the 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 ESG funds, or even those associated with impact investing, sustainable investing or ethical investing, does not necessarily come at the cost of performance.
UKSIF suggests ESG, socially responsible and sustainable investing has exploded in the UK, with current AUM undoubtedly higher in the years since 2016.
The space is expected to grow further as younger investors enter the market. Fund groups that entered the retail market while ESG and sustainable investing was merely a topic for the pension fund trustee are now starting to benefit.
Taha Lokhandwala is deputy editor of Financial Adviser