Investors put almost £1 billion a month into ESG funds in 2020

Responsible investment funds are in high demand. We explain why and name popular fund choices.

Investors put almost £1 billion a month on average into responsible investment funds in 2020, figures from the Investment Association (IA) show.

Such funds, which apply environmental, social and governance criteria (ESG), have seen their assets under management increase by 66% over the past 12 months versus 7% across funds overall. Of the £56 billion invested, almost 60% is invested in equity funds, 20% in bond funds and 20% in mixed-asset funds.

Chris Cummings, chief executive of the IA, notes:“Responsible investment funds continue to capture investors’ imagination, reaching more than 40% of all net sales over the last year. This growth is indicative of how important investing with environmental, social and governance considerations in mind has become.”

In terms of individual fund winners, separate research from Refinitiv Lipper points out that over the past year Royal London Sustainable Leaders Trust (a member of interactive investor’s ACE 40)topped the popularity stakes among ESG funds that invest in UK shares. For bonds, the most popular fund was Rathbone Ethical Bond, which is also in the ACE 40 list, as well as the ii Super 60.

The Pridham report, which monitors fund sales and asset trends among UK investors, found that in 2020 Royal London, Liontrust and Rathbones all benefited from the increased investor demand for ESG funds.

• Want to invest ethically? ii’s ACE 40 list of ethical investments can help
• Check out our Ethical Growth model portfolio 

Why ESG funds are becoming more popular

There are various factors at play, but one of the key reasons is the debunking of thedeeply entrenched view that returns must be sacrificed to invest ethically or sustainably. In recent years, various pieces of research have shown this to be inaccurate, and studies have instead found that investing ethically or sustainably enhances returns.

In addition, while demand for ESG funds has increased across all age groups, a number of studies have pointed to younger investors being particularly keen to align how they invest with their own values.

• Why ESG fund sales are booming
• Our jargon buster runs through all you need to know about ethical investing 

Another driver is increased regulation, including the requirement that UK pension trustees must now consider ESG factors when making investment decisions.

In short, regulation combined with higher investor demand is leading fund management firms down the path of focusing more on sustainability as part of their investment processes.

It has also prompted a flurry of ESG fund launches. 

• Sustainable fund launches already gathering pace in 2021 
• Three ESG fund winners and three spinners
• ESG fund speed dating: the key questions to ask to find your match

The most-popular ESG funds and trusts in 2020 on interactive investor

The top three most popular investment trusts in 2020 were: Renewables Infrastructure (LSE:TRIG), Greencoat UK Wind (LSE:UKW) and Bluefield Solar Income Fund (LSE:BSIF).

For funds, the top three were: Stewart Investors Asia Pacific Leaders Sustainability, Liontrust Sustainable Future Global Growth 2 and Janus Henderson Global Sustainable Equity.

Just two passive strategies appeared in the top 20 list of most-popular investments: the iShares Global Water UCITS ETF (LSE:IH2O) and the Vanguard ESG Developed World All Cap Equity Index.