ESG – Funds
Newton is not just welcoming new clients but is also seeing ex- isting investors within the business switching to more sustain- able versions of its core fund range such as its global real re- turn, global equity and global dynamic bond strategies, Parry says. “That is the biggest change we have seen in the past few years.
“They have seen the performance, they have seen that switch- ing into the sustainable equivalent doesn’t come with a penal- ty, and there is this growing desire by pension funds, charities and private wealth investors to match their values to their in- vestment purpose,” he adds.
It is not just an increase in interest that Walsh is seeing, but al- so a change in what people are talking about when it comes to ESG. “The attention is heightened,” Walsh says. “Everyone is look- ing at ESG now, digging deeper to understand the contribution it makes and what difference it has made during the first few months of this year. “Across the board, there has been an uptick in appetite to inte- grate sustainability into investment strategies,” he adds. “From a conversation perspective, there is definitely more of a focus around the S,” Walsh says. “To be honest, carbon reduc- tion is still the primary driver of peoples’ focus. The S is more interesting, but there are regulatory elements around the E and it is so tangible.” Part of the reason behind the growing interest in integrating sustainability into investment decisions could be political will. Governments around the world face huge bills to meeting sus- tainability targets, such as keeping temperature rises to a max- imum of two-degrees, which is at the heart of the Paris Agreement.
They cannot fund this transition alone and so have been en- couraging private capital to assist, through setting climate and social development goals. Growing interest in ESG funds could also be due to rising awareness of the need to build a more sustainable future. The “we only have one planet” mantra could be working. “Investors are not just seeking portfolio returns, but also re- turns for people and the planet,” MacArthur says. “It is not just about financial returns anymore. It is about future proofing portfolios with the intention to deliver long-term risk-adjusted returns. With the macro factors it paints a picture for increased demand going forward.”
ESG funds: the next generation MacArthur says that the climate narrative is evolving for pas- sive investors with more sophisticated, forward-looking indi- ces emerging. Concepts such as climate transition risk, tilts to- wards renewable energy and net-zero indices appeal directly to investors’ sustainable ambitions.
32 | portfolio institutional July 2020 | issue 94
The climate-focused passive investment market has come a long way in the past decade. The first such indices were fo- cused on carbon and fossil fuels. It was a much broader ap- proach to the issue.
The active ESG space has also changed. More and more funds that help investors meet environmental and social challenges are now using the UN’s Sustainable Development Goals to tar- get their investments. They are investing in companies that the managers believe are aligned to at least one of the 17 goals. Childe says that ESG is not a new concept, but how investors approach it will continue to change. “We will continue to see an evolution in the approach to ESG and sustainability, I antic- ipate we will see more focus on achieving positive social and environmental outcomes from a portfolio across public and private markets,” she adds.
Isleib adds that the S in ESG is going to become more popular with investors. “The social movement is going to pick up steam.
“In the past few years, for sustainable funds the focus on the environment was paramount, but as a result of the pandemic and the equality issues that are going on, this is leading more to a focus on social, towards employees, towards diversity. “Ultimately, these issues are intertwined,” he adds. “We are not going to focus on just one of them.”
Despite the sustainable investment fund universe evolving to include a wider range of factors, the man-made threat to the environment will not disappear from investors’ list of goals. “The climate narrative is here to stay,” MacArthur says.
Building better funds
ESG is a broad church and with so many environmental, social and governance issues to consider, how can managers build
The social movement is going to pick up steam.
Fred Isleib, Manulife Investment Management
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