UK investors are “upgrading” their ESG strategies by moving from “regular” ethical mandates to greener strategies, according to a report from Refinitiv Lipper.
In the report Everything Green Flow, which analyses the UK ESG market activity in 2021, author Dewi John said ESG asset flows were positive across equities, fixed income and mixed assets but also noted the shift in the equity funds investors were favouring with a “stark flow” out of “regular ethical funds” – with £33.2bn of investor cash pulled – while “green ones” saw inflows of £33.5bn.
The head of research for UK and Ireland said: “[In] equities, ESG funds have seen inflows of £35bn and outflows of £33.2bn over the year (up from £26.82bn and £21.22bn for the first three-quarters of the year). This has been a consistent trend over many months.
“However, investors aren’t simply trading like-for-like as they go green, but seem to be using a shift in sector classification as a chance to upgrade to ESG along the way.”
The number of equity ESG options for investors also increased significantly in the final quarter from 237 to 274 products.
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After seeing ESG funds largely outperform non-ESG counterparts in 2020, the performance edge for ESG funds depleted in 2021, which John warned could be a sign of things to come.
“The ‘dirty’ stocks of oil and gas companies drove returns for the year, as alternative energy suffered, John said.
“It’s likely much of this is to do with the growth bias of many ESG funds in an environment where value has rebounded after a good many years in the doldrums. As inflation digs its claws in, this may continue. If so, ESG funds’ returns may begin to lag over the longer term, as we’ve seen for 12-month performance.”
However, John was quick to iterate he does not share the view that ESG investing is in a bubble.
“Yes, the alternative energy debacle in Q1 showed specific areas of the market will become very frothy at times. Should investors worry about the valuations of certain stocks and sectors? That’s always wise. Does this mean that there is a general ESG bubble? No, not least because the investment needed to meet the goals of the Paris Agreement is still way off of where we are currently.
“The challenge is to connect supply with demand to meet both sustainability targets and investors’ risk profiles and diversification needs.”