ESG funds have never been more popular with investors

We explain why ESG fund sales are booming and reveal the top choices among interactive investor customers.

Flows into ESG (environmental, social, and governance) equity funds hit a record level in July, new data reveals, as investor appetite for sustainable investing grows.

The findings come from global funds network Calastone’s Fund Flow Index (FFI), which analyses investor decisions by tracking more than a million buy and sell orders for investment funds each month from financial advisers, platforms and institutions.

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More than two-thirds of UK fund flows by value pass across the Calastone network each month, the group says. It monitors transactions by UK-based investors, placing orders for funds domiciled in the UK using primarily retail investor money. 

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ESG funds buck the trend

July’s trading data shows the popularity of ESG funds is exploding, with £362 million invested. Each of the last four months have set new records for inflows into ESG funds, with a total of £1.2 billion incoming between April and July, equivalent to all the inflows seen in the five years since the index launched, the group says.

The figures look even more impressive set against a wider trend of outflows from equity funds overall: equity funds shed £240 million in July, with UK equity funds especially hard hit.

However, global funds did well with a £605 million inflow in July, boosted by appetite for ESG funds that tend to be global in nature. 

“Global funds, where growth stocks make up a larger share of holdings, are benefiting from a flood of inflows,” says Edward Glyn, head of global markets at Calastone.

“But, crucially, they are also benefiting from a huge marketing push by the fund management industry in favour of ESG funds, partly in response to very strong investor demand for ESG products and partly because they offer better margins for managers. Indeed, because ESG funds tend to be actively managed, they are also the one area of real strength for active equity funds, which are otherwise suffering at the expense of their passive counterparts.”

ESG investing makes a Boohoo

ESG stands for “environmental, social and governance”. A slew of funds have been given this label across the industry, and they are finding favour with investors keen to back companies that are part of the solution, not the problem. However, the concept is not infallible. Recently, fast fashion retailer Boohoo (LSE:BOO) found itself embroiled in a scandal amid allegations workers in its Leicester factory were being paid half the minimum wage, yet Boohoo had scored highly on ESG measures and featured in a number of prominent ESG funds. 

Louisiana Salge, impact specialist at EQ Investors, says the popularity of ESG funds is linked to the integration of ESG factors into the mainstream, as well as improving performance and, for the most part, better risk protection for investors. Those companies that take ESG seriously and weave it into their business models are usually well-run, quality companies, she notes. “In times of market volatility and economic downturn, investors are often keen to be exposed to those businesses that are more likely to survive in the long run. That is a key reason why flows have been surging into funds investing in ESG-leading companies within their sectors,” says Salge. 

The ‘Attenborough effect’

Liam Fowler, a chartered financial planner and investment manager at Heron House Financial Management, says a wider definition of values-based investing, from “ethical” to “sustainable” with a focus on corporate governance, has broadened its appeal.

With governments putting pressure on company boards to improve diversity, and investment managers refusing to back those companies that are damaging the environment, the tide is turning. Meanwhile, consumers are becoming more educated about issues around climate change and plastic waste thanks to David Attenborough’s Blue Planet 2 TV series, for example. “That’s had an impact – our younger clients only want sustainable investments, and now costs have come down, more managers are introducing sustainable funds and they are more competitive,” he says. 

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In performance terms, recently ESG funds have benefited from not holding oil majors, given the sharp drop in the oil price, while tech stocks, which often feature in sustainable investing portfolios, have had an incredible run, he adds. 

Fowler estimates that 20% to 30% of his firm’s new money will go into ESG investments from now on.

“We’ll be trying to move all clients into these funds as we think that’s the future. If companies aren’t willing to adapt and change, they won’t be successful in the long run.”

On the interactive investor platform, among the most popular ESG funds so far this year are specialist funds and trusts focusing on clean energy, infrastructure and the environment, as well as broader portfolios from leading fund houses such as Royal London and Baillie Gifford. 

Myron Jobson, personal finance campaigner at interactive investor, says: “The only way is up, it seems, for ethical investing as interest in this area of investment, once considered a niche strategy, continues to rise exponentially. Baillie Gifford Positive Change continues to be a favourite among our customers, ranking among the top 10 bestselling funds every month since May.

“Perhaps the Covid-19 pandemic, which has affected all aspects of life and has raised some fundamental questions about how we live, work and the sort of planet we want to live in, has fed through and led to a greater demand for ethically minded investment options.”

The top 10 most-bought ESG funds/investment trusts/ETFs on interactive investor in 2020 

Source: interactive investor. From 1 January 2020 to 7 August 2020.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.