Investment managers must meet consumer demand for responsible funds

The pandemic has brought into sharp relief how our lives around the world are inextricably linked, both through the global spread of coronavirus, but also how we’ve come together within our communities to tackle and build back better from this crisis. This collective desire to make a difference has been echoed in the behaviour we have seen from investors , with the steep growth in savings being put to work in responsible and sustainable investment funds as people chose to invest for the greater good not just a return.

Record outflows from the fund market as the global lockdown took hold in March were followed by a recovery that saw record inflows of almost £1bn into responsible investment funds in April. And this wasn’t a one off. Three months of the last four saw investors put over £900m in responsible investments. Even in March itself, at the height of the market turmoil, responsible investment fund inflows stayed positive. Savers invested four times as much in responsible investments in the first half of 2020 than they did in the first half of 2019.

What has happened? We only have to glance at the news over the last year to know that climate change is more and more at the forefront of people’s minds – and the IA’s fund flow data suggests that the pandemic has made many of us think harder about our impact on the world, and whether now is the time to try to make a difference.

Whatever the reason, our industry is responding to meet investor needs.

Climate change may have dominated the sustainable investment agenda before the crisis but the trends we see go beyond this compelling reason for action alone. Savers are increasingly choosing to invest in those funds that single-out companies that are making a positive impact on people’s lives. The ‘social’ component of ESG appears to be becoming more important for investors as we navigate our way through Covid-19. Although impact funds still make up a small proportion of responsible investment funds under management, inflows have been increasing quickly and this is likely to be a growth area going forward.

The growth in total responsible investment funds under management – 89% since January 2019 - also tells a story of strong performance. It used to be said that sustainable investment led to an inevitable trade off with poor performance. This lazy thinking has shown to be false during this crisis. Sustainably-run businesses are companies that are well positioned to thrive as we seek to rebuild the UK economy post-pandemic, and recent studies suggest that responsible and sustainable funds have been more successful at outperforming their benchmarks in 2020 than funds in the wider universe. Also to be factored in are issues such as surging returns in technology and healthcare, or screening out energy and oil & gas stocks, which have not performed well through Covid-19. We will be monitoring performance over the longer term to ensure investors know just how well these funds perform.

But in order to meet our customer’s desire for greener, sustainable and socially responsible investment products we need the companies we invest in to deliver these things as well. We know that climate change could result in a significant loss of value in companies if risks are not effectively measured and managed. That’s why investment managers expect companies to disclose how climate change will impact on their strategy and capital allocation decisions in the future. And why we have asked all listed companies, for the first time this AGM season, to explain in their annual report what impact climate change will have on their business.

As we emerge from the pandemic, there is a huge opportunity to ensure the post-Covid economic recovery contributes to the UK’s ambitions to become a net-zero economy and meet the Paris

Agreement targets. This is an area that will continue to be front of mind for our industry as we seek to support companies, building on the billions invested since March.

Our industry is setting the course to meet savers’ needs, and help businesses meet the challenges of climate change head on. To ensure savers can navigate a potentially complex and confusing set of issues and options, we have developed a responsible investing framework to improve investor understanding.

But this is not just a story for investment management. We hope the UK will use its position as a global leader on sustainable finance to help drive forward change at home and in other countries, including through diplomatic channels during the UK’s G7 Presidency and in the run up to the COP26 Summit. Our industry will hope to draw attention to the UK’s leadership in sustainable and responsible investment, and provide a blueprint for other nations looking to develop responsible investment practices in their own jurisdictions.

We’ve heard a lot of discussion about how we can take this moment of upheaval and change to reflect, and build back our economy and our society in a way that works better for all of us. In this time of great uncertainty, canny savers stuck to their principles and backed responsible and sustainable investment funds as the best place to grow their savings. This resolve tells me that there is no better opportunity than now to make lasting change that will both deliver for savers, and benefit society, the economy, and the planet. So let’s seize it.

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