In an article for FTAdviser by David Thorpe, James Sym, a Schroders fund manager, is quoted as saying the financial services sector “is in a grip of a bubble” and its current valuations do not reflect the actual value of environmental, social and governance (ESG) assets.
Speaking at a dinner at Schroders’ London office, Sym is reported to have said: “It is definitely the case that clients want asset managers to do more with their money than just invest it for a return, and that will continue … There is no doubt that in future we will use fewer fossil fuels than we do now. But the issue at the moment is with the valuations of many of the companies in the ESG space.”
Sym went on to give an example of this. “A company we know of in Spain is able to build solar plants with borrowed money for basically zero interest. In fact, they are borrowing more than the full cost of building them, and that is a classic characteristic of a bubble. I think clients should be aware of this.”
Paul Gibson, an adviser at Granite Financial Planning in Aberdeen, is quoted too and believes that there might be a selling exercise at play. “I do think ESG investing will increase in demand, [but] I can’t help but feel that interest is being fuelled by fund manager groups looking to ‘sell’ their expertise in this area,” he said.
ESG and non-transparent ETFs growing
Elsewhere, ESG investing is still reported as a growing trend. At an Inside ETFs conference, which took place in January 2020 in Hollywood, delegates heard about two ETF trends to watch: ESG investing, and ‘non-transparent’ exchange-traded funds (ETFs).
For ESG, “a tipping point seems to have occurred in 2019”, reports Frank Holmes for Forbes. He explains how net flows into open-end and ESG ETFs quadrupled in 2019 to reach US$20.6bn, referring to data from Morningstar. “ESG appears to have gone mainstream”, he writes.
Non-transparent ETFs allow asset managers to manage a fund without having to disclose all of its investments every day. The benefit of “such a structure will allow active managers to tap into the popular ETF market without having to give away their intellectual property”, reports Holmes.
ESG is high on the agenda for millennial investors, according to a survey conducted by deVere Group, he says, with eight out of ten citing it as a top priority in the consideration process for investing. This is important as, according to Holmes, “millennials are now the largest living generation, having surpassed baby boomers, so this change in investor appetite is expected to transform world markets”.
European appetite for ESG
In Europe the taste for ESG is increasing, reports John Schaffer for Citywire. In 2019, more than €120bn was invested in European ESG funds, 58% higher than the previous year. Schaffer refers to Morningstar data, which reveals that €47.3bn of the inflows were in the final three months of 2019. The number of sustainable funds increased too, with 360 new funds launched, he reports.
Hortense Bioy, director of sustainability research at Morningstar, is quoted in the article. She says that “investors increasingly want to align their investments with their values and sustainability preferences”.
Schaffer details some of the top-performing ESG funds in Europe, with Aviva Investors Stewardship UK Equity at the top of the list. In 2019, it had net inflows of €1.4bn, “almost double the amount as the next best-selling fund”, he writes. The fund has also returned 24.9% over the past year – the sector average is 21.7%.
Another business increasing its ESG range is BlackRock, which in January 2020 declared it would grow its sustainable ETF range to 150 strategies.
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