Over the past 18 months in particular, perhaps a result of the pandemic which saw the rise of the ‘lockdown investor’ and heightened concerns for the environment, responsible funds have gained some serious traction.
The Investment Association recorded £2.6bn worth of net retail sales among open-ended responsible investing funds in the first quarter of 2021, double the £1.3bn figure recorded in Q1 2020. This has since shot up to £4.1bn for the period between April and June this year.
This trend is also reflected in the growing number of ESG products available, be that through the launch of new mandates with a focus on one or all three areas or the introduction of a responsible investing policy in already established funds or trusts.
The closed-ended universe is home to some of the longest-standing ESG products currently available, such as Impax Environmental Markets and Jupiter Green which launched in 2002 and 2006 respectively. But it has also seen a surge in launches in otherwise inaccessible areas such as renewable energy infrastructure.
Just last month, Blackfinch Renewable European Income announced its intention to float with a £300m target and a pipeline in excess of £500m across wind, solar, hydro, hydrogen and other assets.
It cited a compelling market opportunity arising from “structural undersupply of cleaner forms of energy and the EU’s accelerated renewable energy transition targets”.
Meanwhile, conventional funds and trusts are also reinforcing their commitment to investing responsibly. In June this year, Alliance Trust, one of the industry’s most well-known and biggest global investment trusts (with a market cap of £3.2bn as at 31 August) set itself a target to transition the portfolio to net zero greenhouse gas emissions by 2050.
Its manager, Willis Towers Watson, says climate change is one of the defining issues of our time and is at the forefront of developing and implementing the highest standards of environmental best practice in the investment industry.
Alliance Trust plans to implement this strategy by actively engaging with its businesses through voting and effecting change at a key stakeholder level. Where it believes this is likely to be less effective, exclusion is warranted. For example, the board recently approved the exclusion from the portfolio of companies with significant exposure to thermal coal and tar sands.
Similarly, Montanaro UK Smaller Companies and Montanaro European Smaller Companies will not hold tobacco companies; companies manufacturing weapons, facilitating gambling or manufacturing alcohol; or companies engaged in oil and coal-related E&P. Montanaro’s focus on quality across all its portfolios is supported by its commitment to ESG principles and it actively votes the shares it controls and engages with companies.
One of the long-standing arguments against excluding certain stocks or industries is that it harms performance and therefore investor returns. But the popularity of ESG products over the past year has also been boosted by the fact they have broadly outperformed their conventional peers, likely thanks to more exposure to tech and healthcare and less to the oil price.
Sure, investors are less likely to get the hefty dividends largely found across the oil and gas and tobacco sectors, but even the trusts that do invest in those areas can play a pivotal role in helping their companies to understand and manage their ESG risk factors.
Henderson High Income, for example, has exposure to high-yielding industries such as oil and tobacco, which are out of favour with some investors on ESG grounds. But good governance is an essential requisite for stocks being considered for inclusion within the portfolio and the manager, David Smith, also considers environmental and social factors when assessing them.
VietNam Holding, on the other hand actively believes investee companies that focus on ESG factors will provide superior performance over the longer term. The manager conducts extensive due diligence including site visits, interviews of management and a score against its ESG matrix while requiring its companies to demonstrate rigorous adherence to ESG principles.
Once a company has made it into the portfolio, the manager operates a process of ongoing investment monitoring including periodic rescoring against its ESG matrix, which could lead to company engagement or even a proposal to divest.
Just by looking at these four trusts with very different mandates and diverse approaches to ESG, it is safe to say there is no ‘one size fits all’ when it comes to responsible investing; trying to wade through ESG policies can be a confusing – and exhausting – task. We are also very sceptical of broad-brush ratings systems that attempt to inform investors on how ESG-friendly a fund is.
A new way to explore and assess a trust’s responsible investing agenda (if it has one) is via the Association of Investment Companies, which recently launched an ESG education page on its website. Investors can access each trust’s ESG policy and find out whether they have adopted or signed up to sustainability initiatives such as the UN Principles for Responsible Investment (UNPRI) or Sustainable Development Goals (SDGs).
Some might think ESG investing is still just a ‘trend’ or that investment companies are simply jumping on a bandwagon, but the past two years alone have proven that attitudes towards investing responsibly have hit a turning point for the better.
Jayna Rana is an investment company analyst at QuotedData