An expert questions the effects of environmental, social and governance funds on sustainable development
by Bethan Rees
In the first half of 2019, assets in sustainable funds in Europe reached record net flows of £34bn, according to Hortense Bioy for Money Marketing. The net flows for the whole of 2018 were £34.9bn.
With a backdrop of conventional equity funds having net outflows over the past year, the sustainable equity fund inflows reflect the growing approval of strategies with environmental, social and governance (ESG) criteria. “Sustainable investing is fast becoming a mainstream pursuit,” Bioy reports. Sustainable fund assets also reached £547bn in the first half of 2019, a new record.
More products have become available, making it simpler to invest in ESG strategies as demand grows. According to Bioy, as many as 168 new sustainable funds came to market in H1 2019, in comparison to 305 new offerings for the whole of 2018. “Today, there are more than 2,230 sustainable funds available to European investors, covering an ever-expanding range of asset classes and sub-asset classes,” he says.
Bioy references some of the newer equity fund launches that contribute to ESG investing, such as the BMO SDG Engagement Global Equity fund, which targets issues such as poverty and climate change.
However, the line between traditional funds and sustainable funds is becoming more blurred, according to Bioy, as more asset managers integrate ESG into their standard investment process by adding sustainability-related insights to financial analysis.
Money Marketing article
Sustainable finance fairy tale?
Frank Wettlauffer, a co-founder of FNG – an association promoting sustainable investment in Germany, Austria and Switzerland – said that promoting sustainable finance won’t fight climate change, “and allowing or encouraging policymakers to pursue that agenda could actually hinder sustainable development” according to Susanna Rust in a report for Investment & Pensions Europe (IPE).
He wrote this in a recent newsletter from Absolut Research, explaining that the idea of sustainable investments is attractive, but won’t do much in terms of mobilising additional capital to finance sustainability projects. Politicians should instead “change the policy frameworks so that [sustainable investments in the real economy become] more profitable. The money would then come by itself”.
Wettlauffer says that “sustainable investments would continue to be successful because they were attractive in terms of risk-adjusted returns, burnished investors’ reputations, and were guilt-free, but they cannot and will not contribute to sustainable development”.
For those who are interested in a better natural environment, he suggests deploying resources elsewhere. “Quit promoting the fairy tale about sustainable investments’ significant contribution to sustainable development,” he says.
The millennial’s favourite
Millennials appear to have an appetite for ethical investments as opposed to high returns, according to Madhvi Mavadiya for Forbes. Statistics from Finimize, an app that educates millennials on how to become smart investors, show that 64% of its users would accept lower returns for more socially responsible investment.
However, negative screening – a strategy used by responsible investors to avoid funds they don’t want their money in – is not a long-term solution, Mavadiya writes. Finimize says that by rejecting companies, the public can’t have “an influential role in building sustainable businesses”.
At a Finimize event in July 2019, Jennifer Wu, global head of sustainable investing at JP Morgan, said: “We are less powerful if that is the only way we do impact investing. If we simply remove companies from our portfolio, we lose our seat at the table and our ability to influence and help them through this transition. Ultimately these companies will seek funding elsewhere and may not be held as a high standard of ESG consideration.”
Findings from a survey of 350 people by Finimize reveal that 77% of respondents think ESG criteria companies will earn the highest returns in the long run, while 83% are contemplating moving their pension to a sustainable portfolio. But only 9% of respondents have actually done this.
What effect will sustainable investments have on climate change? Leave your thoughts in the comment box below.
Seen a blog, news story or discussion online that you think might interest CISI members? Email firstname.lastname@example.org.