- The flow of investors’ money into ESG funds is gathering pace
- However, a survey of private investors found that only 9 per cent thought it important to invest ethically
Another day, the launch of another sustainable investment fund. Today, it is Amundi, the French asset manager best known in the UK for its exchange traded funds, which is going into partnership with a college from each of Oxford and Cambridge universities to launch the Amundi ESG Global Low Carbon Fund.
That’s how it has been throughout 2020. Early in the year, the impetus was already there. The flow of investors’ money was gathering pace into collective funds that, in one way or another, pursue aims aligned with environmental, social and governance (ESG) factors. Then came Covid-19, since when the flow has become a torrent. Globally, $81bn (£62bn) of new money went into ESG funds in the third quarter of the year, says information provider Morningstar, more than the total amount for all of 2018. Similarly, the combined inflows of $150bn for 2020’s second and third quarters was more than the aggregate inflow for 2019.
As a result, $1.2 trillion of ESG money is now managed globally, spread across almost 3,800 funds, according to Morningstar. That may be a serious underestimate. Back in 2019, when the Global Sustainable Investment Alliance of fund managers produced its most recent biennial review, it said almost $31 trillion was managed in sustainable funds at the end of 2018, 34 per cent more than the end-2016 total. When the alliance announces data for 2020, expect a huge surge.
Yet the discrepancy between those two sets of figures illustrates a problem at the heart of ESG investing that persists even though investors throw capital at it. No one knows quite what it is; where it begins and where it ends.
Start with the difficulty of knowing what to call it. A choice of adjectives is used almost interchangeably – ethical, responsible, sustainable. But arguably as good a definition as any is one dating back to 2005 and used by the Principles for Responsible Investment, a United Nations-backed affiliation of institutional investors. This says responsible investment is “a strategy that incorporates environmental, social and governance factors into investment decisions”. In other words, matters relating to ESG – wide and vague though they may be – always underpin it. Thus, the inelegant initials, ESG, seem the catch-all term to use.
As imprecise as its definition is whether practising ESG investing brings investment success. Granted, there is sentiment by the bucket load, often presented as fact, both that ESG investing is a winning plan and that companies that focus on ESG factors enhance shareholder value. That’s not surprising since both notions appeal to our instinct that virtue should be rewarded. Thus, for example, it seems only natural that the commercial success of Apple (US:AAPL) should be linked to its decision, made way back in 2005, to make its own activities carbon neutral. After all, such virtue attracts the best employees, important in a people business, and captures loyal customers who become less fussy about the price they pay for Apple’s gizmos. Yet just because the link is plausible, or because company bosses line up to tell management consultants that ESG policies correlate with increased shareholder value, does not turn likelihood into proof.
True, investment professionals seem hooked. In a survey of more than 7,000, the CFA Institute, a finance industry standards setter, reports that 85 per cent of its members say they take ESG factors into account when selecting investments; the proportion is up by 12 percentage points from three years ago. CFA members add that the rise is driven by their clients, among whom 76 per cent of institutional investors and 69 per cent of retail investors say they are interested in ESG investing.
The professionals may feel under pressure to signal their virtue. After all, in an age of ‘cancel’ culture, it is hardly a smart career move for a fund manager even to hint at the opinion that ESG investing is for tree huggers. Retail investors may feel no such constraints, especially when they’re talking amongst themselves.
When the UK Sustainable Investment and Finance Association, an affiliation of mostly institutional investors, arranged a survey of retail investors, it found negligible interest in ESG. The association commissioned an analysis of investors’ ‘conversations’ about ESG on Reddit, a discussion website, over the 20 months to this August, a period where the sentiment apparently became established that ‘building back better’ in investing necessitated a strong ESG component. Yet during the whole 20 months, when new conversations often topped 100 a day, there were just 74 conversations that focused on ESG, less than one a week.
In addition – and contrary to the new conventional wisdom – a survey of private investors’ attitudes found that only 9 per cent thought it important to invest ethically and 84 per cent were willing to invest in something they thought unethical. That view was probably consistent with another politically incorrect notion teased out of the survey – that private investors think ESG investing mostly delivers inferior returns.
Most likely, the long-run returns from ESG investing will be neither better nor worse than the markets in which its component assets trade. Already there is too much money invested in ESG mandates for it to be otherwise.
Sure, among actively managed ESG funds there will be winners and losers who perform a merry dance as sectors and investing styles waltz in and out of fashion. Draping a layer of ESG components over that seems unlikely to make much difference. So, for example, Baillie Gifford’s £1.3bn open-ended Positive Change Fund (GB00BYVGKV59) currently looks brilliant with a 71 per cent return in the 12 months to end October. Simultaneously, the Schroder Responsible Value UK Equity Fund (GB00BF783V38), condemned to invest in what has been the wrong region and the wrong equity class, lost almost 29 per cent over the same period, 10 percentage points worse than its benchmark. In three years’ time, will these two have changed places? Who’s to say?
For the most part, however, investors on the passive end of the spectrum won’t see ESG investing as a tool with which to make superior returns, but will seek market-average returns from investments that meet their criteria. Thus, the bursars of Cambridge’s Clare College and Corpus Christi College, Oxford, who have seeded the Amundi low-carbon fund mentioned earlier, seek only to match the performance of their global benchmark, but in ways that meet their ESG objectives.
To that end, the past seems to bode acceptably for the future. If we compare three ESG-style equity indices with their benchmarks – FTSE 4Good UK, S&P LTVC Global and MSCI World Global Leaders Standard – none has excelled, but none has been a complete dunce. Only one – the FTSE 4Good UK index – has performed clearly better than its benchmark, the FTSE All-Share index (see chart below). Even here, the difference is slim. In the 10 years to end November, 4Good generated a 21 per cent total return compared with 16 per cent for the All-Share.
Also over 10 years, the S&P Long Term Value Creation index, a quasi-ESG marker, has underperformed its benchmark, the S&P Global 1200, although not drastically. As for the ESG-screened version of the MSCI World index, it has been inseparable from its parent. True, the performance of these ESG-style indices may not be typical, but chances are – especially as company identities trend towards an ESG identikit – they will be.
Take the optimistic view and the world of the identikit ESG-orientated company may be an improvement. Sure, one can persist with the notion – articulated by Milton Friedman in an essay from 1970 about companies’ social responsibility – that the subject lacks intellectual rigour. There remains truth in that. Not that Friedman would necessarily have opposed the spread of ESG investing. His essay acknowledged that companies must act within the law, but must also follow the rules “embodied in ethical custom”. Today’s corporate ethics are different from those Friedman took for granted. That’s not an unalloyed benefit since the ethics of ESG imply a collectivist solution that might suck the dynamism out of capitalism.
However, the development of ESG investing techniques might at least undermine what Anglo-American fund manager Jeremy Grantham has labelled “the tyranny of the discount rate” where “anything that happens to a corporate over 25 years out does not really matter to them. Therefore, on that logic, grandchildren have no value”. Arguably the whole point of ESG investing is to help put a value on grandchildren.
