There are fears ESG investments are “running out of steam” as new data shows almost half a billion pounds was withdrawn from responsible funds in August this year.
Latest figures from the Investment Association show responsible investment funds under management stood at £96bn at the end of August.
This equates to a 6.9 per cent share of industry funds under management.
Laith Khalaf, head of investment analysis at AJ Bell, said: “It feels like the ESG party is running out of steam, with investment flows drying up and actually going into reverse.
“We’ve now had three months of continuous outflows, and in August a record amount was withdrawn from responsible investment funds.
“Part of the explanation for the ESG slowdown is likely to be the cyclical nature of fund flows. Three years ago ESG was everywhere, fund groups were launching new products and marketing them like crazy, and the saturation point was probably found pretty quickly.”
He said after that initial “gold rush” ESG funds are now “part of the furniture” and fighting for inflows like other sectors.
However Jack Chellman, chief project officer at the Global Returns Project, said ESG considerations is not a fad or “nice to have” for those worried about climate change - which according to the ONS is 64 per cent of UK adults.
He said investors are still trying to find common ground in different definitions within the responsible investing sphere.
Chellman said: “Speaking to the ‘E’ in ESG, I think it’s important not to miss the forest (the fundamental purpose of green investing) for the trees (the ups and downs of the market).
“When it comes to the climate crisis, then, recent ESG data might demonstrate investor impatience with the issues that continue to hinder responsible funds from fulfilling their goals for positive environmental impact.
“Investors may be fatigued by the ongoing challenge of greenwash, or they may want to deliver positive environmental impact beyond markets entirely, such as through charitable giving.
“We have seen time and time again that markets (including sustainable investing on its own), governments, and technological solutions cannot move the needle quickly enough. And we know that we are running out of time.”
Khalaf added that the cost of living crisis also had an impact as well as the UK government’s recent rowing back on its own environmental pledges.
The latest figures show there were also large outflows from fixed income funds of £356mn as well as outflows of £66mn from the global equity income sector.
In August, retail investors withdrew £1.1bn from UK equity funds.
Chris Cummings, chief executive of the Investment Association, said: “August, typically a quieter month, saw muted net inflows after a strong July. Consumer confidence about the economy remains unsteady with the impact being felt of the ongoing cost-of-living crisis.
“While wage growth overtook inflation in June 2023 – the first time since November 2021 – there is still a gap to be bridged between disposable income and investment activity.”
tara.o'connor@ft.com
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