UK investors put £37bn into environmental, social and governance funds during 2021, continuing the trend of these funds attracting huge amounts of money.
These funds have been increasing in popularity in recent years, but rising inflation and interest rates meant the growth stocks which tend to populate ESG funds underperformed so far this year.
In this week’s podcast, FTAdviser reporter Sally Hickey is joined by Ben Yearsley of Fairview Investing and Ryan Hughes, head of investment research at AJ Bell, to discuss whether this is just a bump in the road for ESG or whether it's something more severe, and whether the term is still relevant for the wealth management industry.
Yearsley said the issue with ESG investing was that there was no ‘ESG sector’.
“[An ESG sector] doesn't exist, it’s not an homogenous group like energy, or banks, it’s not one thing and therefore it’s misleading and could lead to people putting together unbalanced portfolios.”
Hughes said the term was no longer helpful because most fund houses used the term too much.
“We need to think about how we slice it differently,” he said.
“We are now seeing ‘ESG creep’ where some funds which are absolutely not run in an ESG manner are starting to say ‘maybe we’ll start excluding certain stocks and certain sectors because they don’t agree with my values’.
“I do think we need to understand how the different strands of the E, the S and the G get applied, and then we can start drawing some distinctions between different strategies which will be helpful for us when we’re analysing funds but ultimately will be more helpful for the end investor, who quite frankly right now I suspect is a little bit confused.”
On the outlook for ESG investing, Yearsley said there was an important distinction to be made between growth, tech and energy companies, all which can be labelled ESG.
“The outlook for ESG investing will be more linked to the interest rate outlook and inflation, so a good ESG company may well struggle in the next few years if it is growth orientated, whereas the structural tailwinds behind clean energy and energy security will put that sub sector into a different trajectory,” he said.
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