Responsible investing's future  

Are we in the early stages of a responsible investment bubble?

This article is part of
Guide to Responsible Investing

Are we in the early stages of a responsible investment bubble?
Photo by Skyler Ewing via Pexels

The practice of responsible investing has raised various questions, from the veracity of green credentials to whether clients are genuinely interested if advisers initiate the conversation.

Another question that has arisen is whether we are in the initial stage of a bubble. But there is also the view that sustainability and a longer-term horizon go hand in hand.

Oliver Jones, investment analyst at discretionary investment manager PortfolioMetrix, says responsible investment has attracted a large amount of interest and inflows over the past few years, with strategies focused on responsible investment performing very well relative to their ‘agnostic’ peers.

But Jones adds: “We do not believe there is a bubble in responsible investment as a lot of these investments are backed by long-term structural shifts in the economy, and are additionally being further supported by government policy – both of which are powerful drivers of future returns.

“However, we do believe there are certain areas of the responsible investment landscape that do look particularly expensive, especially relative to more cyclical areas of the market. For example, clean energy and those companies involved in the energy transition performed exceptionally well over 2020 and, despite the recent pull back, they still look very expensive relative to the broader market.”

Responsible investment funds under management totalled more than £56bn in January and grew 66 per cent over the previous 12 months, compared to 7 per cent across funds overall, according to the Investment Association.

Despite the recent popularity, Ryan Medlock, senior investment development manager at Royal London, says that responsible investing is not a novel approach.

“Although the focus on responsible investing has become sharper and more calculated over the past couple of years... investment managers have been integrating ESG, in some shape or form, into their processes over the past decade and longer in some cases.”

Mollie Thornton, senior investment manager at Parmenion, agrees that responsible investing has grown in popularity, but also notes we are not currently in bubble territory.

“Equity markets are kind of near record high and bond yields are at historical lows, so I think the whole market is in expensive territory, not just responsible investing.

“Responsible investing has become increasingly popular, so some parts of the market have looked a bit frothy recently. At the start of the year with the clean energy companies, some of those stocks were getting quite pricey. There are some names in the S&P Clean Energy Index that I think maybe got overbought a little bit as investors rushed into some of these funds.

“But actually we see there’s quite a lot of opportunity. Responsible investing is quite broad, and I think it’s about the usual basics of investing: making sure you’ve got diversification, making sure you’ve got different themes so you’re not just focused on one area. Potentially it could get expensive at a certain time but I don’t think we’re in bubble territory at this point, and I think there’s still exciting pockets of value at the moment.”