Renewed optimism despite outflows from greener funds.
Wealth managers say their clients are once again turning to sustainable investment funds, driven by a greater understanding of the asset class, lower valuations and better regulation.
Demand for the funds waned after the pandemic as buoyant oil and gas stocks and higher interest rates made it harder for them to outperform.
Of the 26 wealth managers surveyed by Savanta for the FT’s private client wealth management edition, 12 expected investor interest in environmental, social, and governance (ESG) strategies over the next year to slightly or significantly increase.
Seven said they expected it to remain the same, while just one said they expected it to decrease slightly. That manager, Vermeer Partners, said it thought investors would seek higher-risk investments such as alternatives to recover losses, as well as prioritise philanthropy.
The positive outlook from wealth managers on sustainable investment appetite among their clients comes despite data suggesting that global investors have been taking money out of such funds this year.
Clients withdrew a net $40bn from ESG equity funds between January and April, according to research from Barclays — making it the first year that flows were trending negative. April saw a record monthly net outflow of $14bn.
However, that figure is small in comparison to the universe of ESG funds — with worldwide open-ended equity funds and exchange traded funds totalling $1.9tn, according to Morningstar Direct. And by May, Barclays noted that net monthly inflows into ESG funds had turned positive again for the first time in six months, though the year to date figure remained negative.
The main reason for wealth managers’ expectations is that ESG investments are expected to do better as the global economy recovers.
That would mark a turnaround from the past couple of years, when sustainable funds missed out on market returns partly due to being underweight in oil and gas stocks and, initially, being overweight in growth stocks such as tech companies, which had a bad 2022 but rebounded last year.
Meanwhile, renewable stocks — often favoured by sustainable funds — are still struggling in the face of higher inflation and interest rates, which are not set to come down this year as quickly as investors had hoped.
But some argue that could mean now is a good time to invest in them.
Tom Buffham, portfolio manager at wealth manager RBC Brewin Dolphin, pointed out that renewable companies are trading at their lowest valuations since before the pandemic, potentially making the space “more attractive for long-term investors”.
Paris Jordan, head of responsible investing at Charles Stanley, agreed that sustainable investment was “becoming more popular again”, having struggled with performance in 2021 and 2022.
She said that after a period of “disillusionment”, investors now have a better understanding of responsible investment, with new sustainability labels from the FCA later this year expected to help people clarify the different products available.
Clients at Charles Stanley have been more interested in diversified strategies such as those that include engagement, rather than simply excluding certain stocks, she added. Some have even tried to engage in stewardship themselves by attending annual general meetings or acting with ClimateAction100+, the investor group.
“It is fascinating to witness the marketplace maturing and evolving as clients are becoming more aware of how they can shape and influence outcomes,” Jordan said.
Wealth managers also underline the importance of the long-term investment case for sustainable strategies.
“The transition to a sustainable economy won’t be a smooth journey, but the long-term direction is clear, and our clients get this,” said Mariella Rice-Jones, responsible investment lead at Brooks Macdonald, who also pointed out that there are many more investment opportunities in energy transition and decarbonisation than just the oft-cited renewables stocks.
Melissa Scaramellini, fund research analyst at Quilter Cheviot, said that sustainable investment fund managers were now seeing attractive long-term opportunities given lower valuations and continued structural drivers for sustainable themes such as energy transition and healthcare.
She argued that pushing companies to address their environmental and social impact was “as important as investing in companies that are already sustainability leaders”.
When choosing sustainable funds, Quilter Cheviot looks at how asset managers engage with companies and whether they vote against directors if they are not making progress on sustainable targets. Scaramellini recommends the Future World range of passive funds from Legal & General Investment Management (LGIM) as a good example of this.
However, some private client wealth managers think the tide has not yet turned. Gene Salerno, chief investment officer at SG Kleinwort Hambros, believed client interest in ESG-specific investing had waned. That is partly because the investment strategies run the risk of underperforming the wider market in the short term, as recent performance has shown, and partly because ESG matters have become more mainstream, so wealth managers’ portfolios will often consider them as a matter of course.
Here, the interpretation of ESG can become creative. The Investment Association said in April that defence stocks were compatible with ESG considerations because long-term sustainable investment was “about helping all sectors and all companies in the economy succeed”.
William Buckhurst, investment director at Vermeer, said some clients were taking “a more pragmatic approach” towards investing in such companies. He added: “Different clients will have different concerns.”
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