ESG surges up fund managers’ agenda

By Raymond Greaves, Head of Research, finnCap

The motivation for fund managers to apply ESG to their decision-making appears to have shifted somewhat over the past year.

Risk management is now the dominant reason, with investor pressure emerging as a reason for the first time. With COP26 in full swing, fund managers are upping their game on ESG issues, if finnCap’s latest fund manager survey is anything to go by. According to the results of our annual poll, 100% of fund managers of UK smaller company funds are incorporating ESG factors into their decision-making process. This represents a dramatic shift from 12 months ago, when the figure stood at 67%.  Money continues to pour into ESG-focused funds, and our data suggests that at current run rates, 2021 investment in ESG focused funds could be double 2020 levels, which itself was double 2019.

The past year has seen a positive step-change in attitudes towards sustainable investment and encouragingly, 80% of managers plan to consider more ESG factors in future. While governance is still regarded as the most significant aspect of ESG, both Environmental and Social factors have made huge strides forward in 2021 vs 2020. 60% of fund managers now use these factors, up from 14% and 28%, respectively, in 2020.

Another significant trend relates to fund marketing. All the survey respondents said ESG would either be at the forefront or a significant part of the marketing message for a new fund, up from 43% in 2020.

The pandemic has been a big catalyst for change in attitudes to ESG, but there are other powerful drivers at work. There is evidence that funds with a specific ‘ESG’ flavour produce better returns at lower risk; extreme weather events are playing into the climate change thesis, and baby boomer wealth is gradually being transferred to younger investors who have a greater propensity to invest on an ESG-compliant basis.

This accelerating inflow dynamic for ESG funds is very evident in the UK, Europe and the US. For example, while AUM in UK equities has increased only 13% since July 2019, AUM in UK responsible investments has increased by +225% over the same period

These profound changes and the level of momentum mean it is almost impossible to conceive of launching a new fund in Europe without being able to demonstrate its ESG credentials.

At finnCap, we are passionate about building ‘sustainable advantage’, engaging with our clients and wider stakeholders to deliver genuine change. Sustainable Advantage is about putting ESG in context and embedding it in business to deliver sustainable growth. It’s about future proofing, staying relevant and ensuring longevity. To do that, we must address the risks associated with ESG. The focus on ESG brings both challenges and opportunities for fund managers – but there’s no doubt that sustainable investment has increasingly positive outcomes for both society and probably returns, too.

By Raymond Greaves, Head of Research, finnCap

The motivation for fund managers to apply ESG to their decision-making appears to have shifted somewhat over the past year.

Risk management is now the dominant reason, with investor pressure emerging as a reason for the first time. With COP26 in full swing, fund managers are upping their game on ESG issues, if finnCap’s latest fund manager survey is anything to go by. According to the results of our annual poll, 100% of fund managers of UK smaller company funds are incorporating ESG factors into their decision-making process. This represents a dramatic shift from 12 months ago, when the figure stood at 67%.  Money continues to pour into ESG-focused funds, and our data suggests that at current run rates, 2021 investment in ESG focused funds could be double 2020 levels, which itself was double 2019.

The past year has seen a positive step-change in attitudes towards sustainable investment and encouragingly, 80% of managers plan to consider more ESG factors in future. While governance is still regarded as the most significant aspect of ESG, both Environmental and Social factors have made huge strides forward in 2021 vs 2020. 60% of fund managers now use these factors, up from 14% and 28%, respectively, in 2020.

Another significant trend relates to fund marketing. All the survey respondents said ESG would either be at the forefront or a significant part of the marketing message for a new fund, up from 43% in 2020.

The pandemic has been a big catalyst for change in attitudes to ESG, but there are other powerful drivers at work. There is evidence that funds with a specific ‘ESG’ flavour produce better returns at lower risk; extreme weather events are playing into the climate change thesis, and baby boomer wealth is gradually being transferred to younger investors who have a greater propensity to invest on an ESG-compliant basis.

This accelerating inflow dynamic for ESG funds is very evident in the UK, Europe and the US. For example, while AUM in UK equities has increased only 13% since July 2019, AUM in UK responsible investments has increased by +225% over the same period

These profound changes and the level of momentum mean it is almost impossible to conceive of launching a new fund in Europe without being able to demonstrate its ESG credentials.

At finnCap, we are passionate about building ‘sustainable advantage’, engaging with our clients and wider stakeholders to deliver genuine change. Sustainable Advantage is about putting ESG in context and embedding it in business to deliver sustainable growth. It’s about future proofing, staying relevant and ensuring longevity. To do that, we must address the risks associated with ESG. The focus on ESG brings both challenges and opportunities for fund managers – but there’s no doubt that sustainable investment has increasingly positive outcomes for both society and probably returns, too.