Sustainable and ESG-focused funds should sit at the heart of investors’ long-term portfolios now, with the seismic shift seen towards such mandates in recent years unlikely to be reversed, according to Adrian Lowcock at Willis Owen.
It is a trend we have been seeing for some time now among larger investors like pensions, but small investors are following suit. Just this week we saw Colorado residents lobbying CPP, one of Canada’s biggest pension funds (and its Canadian stakeholders), to withdraw support from Crestone Peak Resources, which has been accused of polluting air and water in Colorado.
Lowcock, head of personal investing at Willis Owen, has noted the investment style had outstripped non-ESG approaches in the last one, three and five years, with a five-year return of 94.6% for the MSCI ACWI ESG leaders index versus the MSCI ACWI index return of 91.3%.
While ESG funds may have been satellite funds in the past, meeting the desire of some individuals who wanted to invest in line with their ethics and principles, Lowcock says these are no longer “nice to have” investments.
“These funds are core holdings now. Whereas previously, ESG was a secondary consideration, a nice to have tilt to portfolios, the world has been changing. A focus on companies which do less harm to the environment, be that alternative energy, greener food production or waste reduction, are here to stay, and crucially, they are being rewarded by investors,” he said.
Clearly the COVID pandemic has certainly accelerated an existing trend, as people took the forced circumstances of lockdown to re-evaluate their lives and started to witness first-hand the effect human activity was having on their local environment. But the key now is whether these sectors, such as oil and airlines, come back to the fore – that’s very unclear at present, unlike the desire to use non-carbon or low-carbon energy, for example.
Lowcock believes the outperformance of sustainable, ESG and ethical funds will continue from here, with many of the old-guard old economy stocks likely to struggle unless they change.
“ESG investing is now a huge part of investing common sense, with many areas that responsible and ethical funds avoid being invested in “old” economy industries in decline,” explains Lowcock. “The development of the fourth digital age is also supporting progress in ethical investing as new technologies make opportunities more cost effective, and the use of data means companies can better track the impact they have and also be more accountable for their behaviour.”
Willis Owen says these trends are not one, three or even five-year ones. They are here to stay, and investors who are not on board with them are going to miss out over the long-term.
Pension fund managers are increasingly expecting the funds they invest with to adhere to strict ESG criteria and private investors are focusing more of their efforts on stocks that support the growth of a cleaner, more climate friendly economy. It is only a matter of time before most funds sold to small investors will need to have cut climate damaging stocks out of their portfolios.