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Direct investors’ appetite for environmental, social, and governance (ESG) investment funds appears to be slowing after years of rapid growth.
Hargreaves Lansdown (HL) told Money Marketing it saw an increase of flows into responsible investment funds (ESG, ethical and impact) of more than 6,500% over the past five years.
It also saw an increase in assets under management in responsible investment funds in 2021 compared to 2020.
Despite this the flows were down compared to the previous year.
“2020 was a bumper record year, with extraordinary increase in flows thanks to fund launches, positive performance and increased investor awareness,” HL head of investment analysis and research Emma Wall said.
ESG vs impact – what’s in a name?
Charles Stanley saw a similar dynamic with a “significant increase” in money invested in ESG funds.
Its chief analyst Rob Morgan said: “There was a very significant increase in the order of 50% from 2020 to 2021, but appetite is so far much lower this year and early indications suggest below 2020 levels.
“We saw a strong increase in demand in 2019, 2020 and 2021 but that has fallen back a bit in 2021 and into this year, possibly a result of waning performance of some of the most popular funds which have a ‘quality growth’ style.
“Having been a positive factor for so long this is now underperforming the broader market over one year.”
However investment into ESG solutions still seems to be very modest overall. Chelsea Financial Services (CFS) reported that it made up about 3% of all the investments made through its platform in 2021.
This amount represents approximately £2.2m.
Although the appetite for ESG funds might still be modest, CFS noticed that direct investors increasingly shun funds investing in businesses with a harmful impact on the environment.
CFS managing director Darius McDermott said: “While investors are not necessarily being proactive about ESG funds, we have found that they are less enthusiastic about funds that invest in oil, for example.
“In effect, our clients are more negatively screening at the moment than positively screening.
“There is definitely a momentum in the market for these products and we are keeping an eye on them to make sure they are true ESG offerings.
“We always talk about them to our clients and would expect demand to increase over time.
“Some parents are investing more in these funds for their children through Junior ISAs than for themselves, which is also interesting.”
ESG investing: Time for fund providers to abandon the gold rush mindset
One of the issues with ESG and responsible investing is that few clients understand it fully.
Morgan said: “Few clients understand ESG and responsible investing in detail and it is something we believe is very important to educate on, helping them make decisions.
“There is a healthy scepticism on the part of some of those that are more knowledgeable on the subject.”
For Emma Wall, labelling will be key for the future of ESG investing to reassure investors that the funds they invest in do what they say on the tin.
She said: “Our clients care about funds delivering the outcomes they expect – in the case of responsible funds that means investing with environmental, social and governance factors in mind and where stated – such as an ethical fund – having appropriate exclusions.
“We regularly survey our clients and have access to incredible data insights which show our clients on the whole prefer asset managers to manage ESG risks on their behalf, balancing these priorities with investment returns.”
But Wall pointed out there is a growing number who want their investments to have impact, and directly tackle issues such as climate change.
“Labelling will be key in ensuring all investors – whatever their ESG priorities – can identify the right funds and solutions for them,” she said.
For now, direct investors seem to stay in their comfort zone when it comes to ESG investing.
McDermott added: “We find that interested investors at the moment are going for the very obvious funds like Ninety One Global Environment, Pictet Global Environmental Opportunities, LF Montanaro Better World and Baillie Gifford Positive Change.
“There is therefore a degree of comfort for investors that these funds are doing what they claim to do.”
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