The rise of ESG funds: post-webinar Q&A with Calastone’s Josh Wade ______

Blog / 01 Jun 2020

Josh Wade, Associate Director, Product Development

We recently hosted a webinar on ‘The rise of ESG funds’, where we explored data from our Fund Flow Index to highlight a significant and growing upsurge in both supply and demand for mutual funds offering environmental, social and governance (ESG) investment themes. Throughout the webinar we received a number of particularly interesting questions from the audience. In this piece we follow up with Josh Wade, our webinar’s host, and delve into the detail of some of the best questions we saw.

If you would like to access a full recording of the webinar, please visit our website.

 

The moral judgement that needs to be applied to certain investments is complex and nuanced.  An example is electric cars, where the disposal of their batteries is far more damaging to the environment than their fossil fuel counterparts.  How do you defend an investment decision where popular perception about what is “good” from an ESG perspective is not necessarily true?

Ultimately it comes down to education, as humans we’re not designed for long term thinking but investment managers are mandated to think in this way so there should be greater weight attributed to their analysis and ultimately their intentionality. We’re seeing an increasing focus on ‘intentionality’ as a means for clients to tie together all of the disparate data, factors and philosophy in this space. Without being a critic I’m not sure that fund ratings always help clients discover the ‘truth’ either because they don’t encourage critical thinking and active stewardship from investors. It’s why I’m a personal advocate of active management in this space because it creates more opportunity for discovering the truth and subsequently changing ‘popular perception’. Whenever I think of popular perception in this area I think of this Yale study on climate perception which shows that there is a significant proportion of people in the US who believe that Global warming doesn’t pose any risks.

Do you see most managers integrating ESG across their range, or maintaining a flagship ESG range?

On the whole we’re seeing an increasing trend towards integration of ESG factors as an ‘extra financial’ element into the investment selection process across the entire range. This is in part driven by asset owners starting to enforce it as part of the selection process for large institutional mandate but also by increasing regulation. Alongside this we also see fund firms maintaining dedicated ‘sustainable’ or ‘responsible’ ranges. This raises lots of questions around intentionality and whether investors are being rewarded for going beyond the average in their engagement/stewardship with the companies they invest in.

Do you see pension schemes being made to enforce consideration on ESG or to leave it to their discretion, as is currently the case?

One of the questions that I wanted to ask of the audience during the webinar was who is driving the enforcement of consideration on ESG – regulators, asset owners or investment managers? So, this question is particularly interesting to me. What we’re seeing is that it’s still discretionary but increasingly asset owners are coming to the view that ESG risks entail financial risks, and this is subsequently impacting the fiduciary responsibility of asset managers. An important trend that we are seeing is that ESG is now almost becoming a mandatory criterion in the selection process for managers of large institutional mandates. So, whether it’s asset owners such as pensions schemes enforcing this consideration or it’s the proliferation of risk analysis that shows the financial materiality of ESG we’re seeing a shift to mandatory consideration of ESG across the investment process.

If the view is that passive equity funds are seen as a safer haven, what is the implication for ESG funds? Given that they are primarily in the active arena

The numbers speak for themselves – we have not seen outflows from ethical funds. In fact only one month (March 2020) has seen ethical outflows since late 2017. So, although ethical funds are primarily active in nature, the appetite for ethical clearly trumps the aversion to active at the moment.

An article in one of the ESG specialist investment magazines stated that much of the growth in UK ESG funds was simply rotation from non-ESG funds. What is your view or evidence on this? 

We can’t track where all the money has come from exactly, but even if we could the inflows to ethical funds are still relatively small compared to wider funds so the ‘damage’ to regular funds is likely limited. Logically some of the money is probably newly saved cash and some is potentially switched. What matters for fund managers is their overall AuM, so if they are protecting their business by launching funds people want to buy rather than see assets leak to rivals, that’s all part of the game and always has been.

 

 

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