Last year, UK ESG investment funds took in more money than any other—and two-and-half times the previous 12 months, according to research from Refinitiv Lipper. Despite generalised market turmoil, ESG funds attracted more assets than ever, netting £27.3bn (Chart 1).
Chart 1: ESG Investments into UK Investment Funds
Source: Refinitiv Lipper
That takes UK ESG assets* up to £124.8bn: an increase of 28% year-on-year:
Source: Refinitiv Lipper
This leaves the top 10 ESG Lipper Global Classifications by total net assets as follows:
Source: Refinitiv Lipper
As you can see from the chart below, 2020 was the year that Equity Global, already ahead in terms of TNA, really pulled away from the pack.
Chart 2: ESG Fund Flows, 2016-2020 (£bn)
Source: Refinitiv Lipper
Global a Go-Go
With £33.9bn in total net assets, Equity Global now holds more than the next five classifications combined.
The largest ESG-badged share classes here are ACS Climate Transition World Equity X1 Acc GBP, ACS World Low Carbon EQ Tracker X2 Acc (both from BlackRock), and Baillie Gifford Positive Change B Acc. The first was launched in August 2020, so its growth is remarkable, taking £1.6bn to year end, leaving rivals in its wake over the past few months. The latest fund size was £2.7bn at 31 January 2021.
MS INVF Global Brands I GBP saw the third largest inflows last year among Equity Global. The persistent slipperiness of ESG as a concept is illustrated by the fact that its third largest holding, at the end of September, was tobacco company Philip Morris International. One person’s sin stock is another’s transition play, as different ESG goals and criteria will drive diverse investment processes. Some will give more weight to environmental, rather than social factors; within environmental factors, the need for low-fossil fuel exposure can pull in a very different direction to the desire to fund the transition to a low-carbon economy.
Money Market GBP comes in next, albeit at a considerable lag, with £12.3bn net assets. This is a little surprising (to me, at least), as there has been little activity in ethical money market instruments over the past few months. However, there are only two making the running here: Royal London Cash Plus Z Acc (£5.6bn TNA) and Blk ICS GBP Liq Envirn Aware Agency GBP Dist (£3.3bn).
Emerging Market and Asian Leapfrog
That global emerging markets and Asia Pacific (APAC) equity classifications take fifth and eight places, respectively, in TNA shows how far ESG has come in a few years. Early in the previous decade, asking a fund manager from these areas what their ESG processes were would as likely as not be met with derision. This attitude encompassed Japan, which, although certainly a developed market, was still seen as a little ‘Wild West’ when it came to matters of governance.
The adoption of ESG principles by Japan’s Government Pension Investment Fund (GPIF)—the world’s largest pension scheme—in 2015 was a game changer for the rest of Asia, with representatives of the fund going on to act as ESG evangelists throughout the region, providing examples of best practices to other large regional institutional investors. That, in turn, has increased the confidence levels of ESG investors globally and encouraged flows to the region. So, while Europe is still at the forefront of ESG, there has been much speculation that Asia could leapfrog it in the not-too-distant future.
ESG in the UK
Turning to UK funds, Equity UK and Bond GBP Corporates hold ESG assets of £11.2bn and £10.1bn, respectively. The largest ESG fund in the former is the Royal London Sustainable Leaders Trust, with £2.4bn across all share classes. It’s also enjoyed the strongest Equity UK ESG flows for the past year. Rentokil is a top-10 holding, so its ESG criteria doesn’t stretch to the animal welfare of unwanted domestic wildlife.
Royal London funds also make a strong showing, both in terms of TNA and 2020 flows, in the Bond Corporate GBP classification. However, the Rathbone Ethical Bond fund—which netted £462m—was the big winner among GBP corporate bond vehicles in 2020.
Royal London, along with Liontrust, also has a dominant position within ESG mixed-assets flows. Last year, Mixed Asset GBP Balanced made a particularly strong showing, taking £2.3bn of its total £6.2bn. This is likely a function of it having been a particularly strong year for the classification, with mixed assets being an area where ESG has really pitched its tent.
Lastly, as we noted in December, Equity Theme—Infrastructure is an increasingly important area of sustainable investment, bound up closely with the UN’s sustainable development goals, and should do well as the world emerges from the pandemic. It takes the great majority of ethically badged assets of the equity themes.
Given growing investor appetite alongside regulatory requirements—the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainable Finance Disclosure Regulation (SFDR)—this lift-off in ethical investing seems more likely to be an ongoing trend rather than a one-year anomaly. How investors choose to deploy their money within an increasingly diverse ESG ecosystem will be the thing to watch.
* Defined as funds with an ethical flag, registered for sale in the UK and with the reporting currency in sterling
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