Why the investment fund industry is rushing to catch up on sustainability

Written by Rebecca Jones on 25th Feb 2019

Investment into Good investment funds is going gangbusters. According to statistics from the Investment Association (IA), private investors like you and me poured £1.3 billion into what it calls ethical funds last year – a 250 per cent increase since 2015 (when we invested £371 million).

Over the same period, money into all UK-based investment funds has dropped by 124 per cent (falling from £22.6 billion in over 2015 to -£5.5 billion out last year). That’s right: overall investment fund flows have fallen one-hundred-and-twenty-four per cent over three years, while ethical investment is up 250 per cent.

This is not least due to huge outflows last year as global markets tumbled, with the £5.5 billion lost in 2018 the first net annual loss for more than a decade. Meanwhile – you guessed it – flows into ethical funds grew 24 per cent, or by more than £250 million from £1.04 billion in 2017.

Sales of ethical funds are up 250 per cent since 2015, while total UK-based fund sales have fallen 124 per cent

Not that you, or anyone not looking for it could easily establish this, though, as these figures are published right at the end of the IA’s 16-page monthly data bulletin – behind ‘adviser fund platform ISA sales’.

Way-off

One might argue that the IA has, historically, been a little disinterested in ethical funds. Despite the first fund of this type being launched in 1984, the investment body is yet to make a proper sector for Good investing, despite hosting close to 40 other sectors.

Indeed, upon doing a rather large piece of research into this in 2017, this Good Money Girl discovered that the numbers the IA publishes for ‘ethical funds’ are – at best – a good guess.

This is because they are based on figures the industry body gets from an independent research agency, which isn’t too sure what is on that list, or how up-to date it is. It is, though, sure it doesn’t include European or FCA-approved offshore funds, where a huge chunk of sustainable funds reside.

Nor does it include the wave of funds now investing according to environmental, social and governance (ESG) principles; nor the green bonds sector, which has exploded from £3.8 billion in 2012 to £190 billion today.

The IA describes private investor demand for ethical funds as ‘muted’

As such, many in the sustainability sector suspect the IA statistics are off the mark – and probably by the billions.

The industry body does go into a little more detail on ESG in its Asset Management Survey, in which it notes its use as growing among larger pension schemes, but describes demand for responsible funds from private investors as being ‘muted’ (citing total assets, rather than sales growth – see below).

What’s in a sector?

When questioned on this, the IA – an institution heavy with the City’s old belt and braces brigade – usually (as above) cites lack of demand, as well as the complexity of making a sector for these types of funds, many of which do – admittedly – have very different investment approaches.

This hasn’t inhibited the creation of the £27.4 billion large Flexible Investment sector, though, which contains such funds as Ruffer Japanese and Sarasin Global Equity Real Return – no doubt running quite different strategies. Nor, indeed, the ‘Unclassified’ sector.

Complexity hasn’t inhibited the creation of the £27.4 billion Flexible Investment sector

Interestingly, the challenge hasn’t been too great for the Association of Investment Companies: the body that oversees listed investment trusts. This is where most vehicles that invest in renewable energy reside and which boasts the Renewable Energy Infrastructure and Environmental sectors – which helps to track money flows and allows accurate reporting.

A question of scale

Perhaps, then, the problem could be scale. While being the fastest growing sector in the IA universe for three years, the ethical fund segment accounts for just 1.4 per cent, or £16 billion, of the £1.5 trillion UK fund industry.

Taking this into consideration, it is perhaps fair to say there isn’t the demand that would warrant the IA paying considerable attention to this sector; but not from private investors.

Lack of demand doesn’t come from private investors

In the IA’s  60-year history, not much has changed by way of either regulation or innovation (although there have been several re-brands), with some that have tried finding themselves thrust onto Threadneedle Street on a cold, rainy night – sans bowler and blazer.

These have included Daniel Godfrey, ex CEO of the organisation, who along with now arch-Remainer Gina Miller tried to make fund fees and charges more transparent in 2014; and Helena Morrissey, who attracted criticism for her thoughts along the same lines during her brief tenure as IA chair between 2014 and 2016.

Ch-ch-ch-changes

All this may, however, be set to change. Back in November top industry rag Investment Week (like Hello! for fund folk) broke the news that the IA was consulting on establishing some definitions and guidelines for the sector.

Last month the IA confirmed the news, stating that it has opened a consultation that: “seeks the views of asset managers on key aspects around sustainability and responsible investment, with the aim of bringing greater clarity to help savers and investors navigate and better access this growing feature of the investment management industry.”

The IA is seeking the views of asset managers on sustainability and responsible investment

The consultation, which closes on 1 March, covers the following three key areas: agreed standard definitions for different sustainable investment approaches; development of a ‘voluntary’ UK product label, and a review on how fund managers define and report on ‘ESG’.

The move comes some eight months after the European Commission announced it too is holding an EU wide-review of sustainable investment. As part of this, the Commission is also aiming to put firm definitions in place that it hopes will encourage further investment into the sector.

Who-are-EU

The EU is doing this in recognition of the urgent necessity of the task. As the world has woken up to the need to channel trillions of pounds into sustainable infrastructure in order to halt the collapse of the planet, governments all over the world have set investment targets.

Indeed, at the press conference announcing the consultation, European Commission vice president Valdis Dombrovskis boldly proclaimed: “On climate change, we are running out of time. The Titanic could not turn to avoid the iceberg at the last minute and we will soon be in a very similar situation.”

“On climate change, we are running out of time. The Titanic could not turn to avoid the iceberg at the last minute,” European Commission

To achieve these targets we need the pensions and investment industry, which manages over £77 billion of the world’s money. (To put this into context, if that was split between every living Briton, we’d all get around £1.2 million each)

Effectively, governments need asset managers to stop investing this money in Shell and British American Tobacco and start investing it in humanity’s survival. For that to happen rules and guidelines must be set by industry bodies, and they need to be followed.

Brexit has, perhaps, given the IA a little breathing space here, with anything the EU sets potentially no longer applicable after the 29 March. Nonetheless it has seemingly woken up and smelt the Chianti and we all eagerly anticipate the result of its in-house review.

With pressure coming from both above and below, no longer can the City drag its feet on Good investment. Call it whatever you want, but it’s the future.

The Investment Association has been contacted for comment.

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