This year will be remembered for a lot of things – in terms of both politics and financial markets. However, one notable absence has been a long-awaited jump start for environmental, social and governance as well as sustainable investing among retail investors.
Discuss the merits of either strategy with anyone involved in the space, and they remain optimistic both will eventually become a mainstay. Many began this year with expectations that 2015’s bad year for energy, mining and oil stocks might even spur on retail investors to take the concepts more seriously.
However, after 2016 the gulf between retail investors and pension funds in terms of assets committed to such strategies has got even bigger. Assets under management in ESG strategies – and others of the same ilk – have grown significantly in recent years, according to Eurosif, a Europe-wide body that collates data on the subject. Strong anecdotal evidence suggests this is still primarily from institutions.
It is becoming increasingly apparent retail investors remain unconvinced on the benefits on long-term equity or bond investing, with a focus on environment, social, governance or sustainability considerations.
Despite this, some fund groups continue to bank on this kick start. This was further demonstrated by Liontrust’s acquisition of Alliance Trust Investments last week. The latter’s investment team have become known for its sustainability focus, currently running nearly £2bn of retail assets.
The acquisition will push Liontrust’s AUM past the £8bn mark – with the firm citing ATI's sustainability focused-strategies and expertise as the key driver for the move.
Liontrust chief executive John Ions explicitly mentioned strong demand for sustainable investment, but made time to highlight its growth from international sources and millennial investors, despite the latter yet to enter the market in their droves to become a financially viable target.
In addition, over the short term it is becoming increasingly likely ESG and sustainable investing will become more difficult, and potentially see a fall in demand.
The very stocks whose struggles should have boosted interest have now started a return to form. Hermes research suggests while companies with strong ESG credentials do outperform over the long-term, they will underperform when value stocks come to fore, a turn currently taking place.
It makes one wonder when this significant turn will come from retail investors. This year seemed ripe for ESG and sustainable investing to really see that spike in demand. Perhaps many were preoccupied with market shocks and currency routs.
So, for fund houses who continue to build their focus around such strategies, things ,may become difficult in the short-term. Should demand from millennial investors be the catalyst that really turns the market, then it can’t come soon enough.