ESG news
PANDEMIC TURNAROUND AS INVESTORS GO GREEN AND PASSIVE
Passive ESG funds appear to be investors’ darlings, the latest data suggests. The Covid pandemic may have not just reinforced changes in consumption patterns, such as the growth of ecommerce, but it has also backed up a pattern of investment trends towards collective ESG vehicles, which was already on the horizon, with passive ESG funds as the main beneficiaries. At the time of writing, ESG compliant equity index funds re- ported more than £6bn in inflows, according to Calastone. The growth in demand for sustainable passive funds coincides with recent a surge in ESG ETF issuance. Between May 2015 and May 2020, the number of ESG-compliant funds increased to more than 300 from less than 30, according to Refinitiv Lipper. Simultaneously, their assets grew to more than €300bn (£273.6bn) from less than €50bn (£45.6bn), the data provider said. But the past six months have also shown another, some- what surprising, trend. While traditional, actively managed eq- uity funds reported some £5.7bn in outflows in the year-to-
date, ESG compliant active equity funds bucked the trend, reporting £2.4bn inflows year to date, according to Calastone. The firm also highlighted that demand might be outstripping supply with the value of buy orders outstripping the value of sell orders by 2.6 to 1. Nevertheless, in absolute figures, the as- sets in conventional, actively managed funds are still 20 times larger than the ESG compliant active fund market, according to Lipper.
One reason for the growth in demand for green funds might be enhanced reporting requirements, with tighter reporting standards for UK investors’ Statement of Investment Princi- ples entering into force in October. But recent ESG scandals, such as exposure to firms like Boohoo and investments in fos- sil fuel companies, show that simply buying a fund with a green label does not absolve investors of their reporting duties. At the end of 2019, the Wall Street Journal revealed that eight of the 10 biggest ESG funds in the US continued to invest in oil and gas companies. Meanwhile, in the UK, some actively man- aged ESG equity funds had Boohoo as one of their biggest holdings.
NATIONAL GRID PENSION SCHEME CONFIRMS DIVESTMENT FROM THERMAL COAL
The trustee board of the National Grid UK Pension Scheme confirmed in October that it intends to divest from thermal coal, chief investment officer Rob Schreur has told portfolio institutional.
The scheme, which manages more than £14bn in assets across its UK and US funds, has confirmed the divestment in its UK portfolio. Earlier this year, the scheme also awarded a £185m real asset mandate to Octopus Renewables to invest in solar- and wind energy plants. National Grid joins other pension schemes, including £68bn University Superannuation Scheme (USS), which announced in June this year that it would divest from companies deriving more than 25% of their profits from thermal coal. Over the next two years, it intends to divest from all fossil fuel manufacturers. Nest also announced this summer its plans to divest from fos- sil fuels. In the first instance, it intends to sell all holdings of companies involved in coal mining, extracting oil from tar sands and arctic drilling. Nest intends to shift around £5.5bn of its equity investments into funds with a climate aware tilt. As part of this divestment strategy, the auto enrolment provider has, for example, sold all remaining shares in mining giant BHP in August.
32 | portfolio institutional October 2020 | issue 97
In July, Australia’s second largest pension fund, the $83bn (£46.1bn) First State Super, also publicly committed to divest- ing from companies that derive more than 10% of their reve- nue from thermal coal, a move which is aimed at dramatically reducing its carbon footprint over the next 10 years. Phasing out thermal coal is one of the key targets for investors wishing to address climate change due to its high CO2 content. It is also a demand that is backed by financial incentives. Ther- mal coal has been identified as one of the sectors at risk of becoming a stranded asset due to its links to climate change, a risk that could result in potential losses for investors. For the time being, divesting from coal is a move that is still attached to a short-term cost. Within the FTSE100, some of the biggest mining firms that still extract thermal coal have seen their share price rise over the past five years. Examples include Anglo American, whose share price has risen to 1,944p from 726p during the past five years, and BHP, which still holds a significant coal business, has seen its share price rise to 1,654p from 1,194p. Longer-term, institutional investors could benefit from divest- ing, as miners face a challenging profit outlook. Earlier this year, facing investor pressure and an adverse growth outlook, Anglo American and BHP committed to selling the remainder of their thermal coal business. However, they could struggle to find a buyer as thermal coal extraction has become increasingly hard to insure. Rio Tinto has sold its coal interests.
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