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Bumper investments into sustainable funds this year add to evidence that the pandemic will prove a tipping point for sustainable investing.

Money invested into ESG (Environmental, Social and Governance) funds ballooned to $71.1bn between April and June, according to the data company Morningstar, and pushed the total invested in these funds to over $1trillion.

The figures were quoted in the Financial Times today, with the paper also citing separate data which claimed the amount invested in ESG funds between April and July 2020 was more than the previous five years combined.

Money appears to be following returns, with investors able to see that gains from ESG-focused funds have generally beaten those of equivalent non-ESG funds. Further research from Morningstar, from June, suggests that 60% of 745 ESG funds across Europe have beaten their generalist counterparts over one, three and five years.

The pandemic appears to have added more momentum to this trend, both in terms of returns and investor appetite for ESG. Here at Fidelity, work by our equity analysts during the early stages of the pandemic analysed the stock market performance of companies that ranked highly on Fidelity’s in-house sustainability scores. It showed that they held up much better than companies that ranked poorly.

There may be specific reasons why an ESG approach has outperformed. Avoiding oil companies - which were already dealing with an historic crash in the oil price before Covid-19 hammered global growth and demand - is likely to have boosted ESG funds. There may also be a longer-term trend at play, with investors now seeking out companies with a more clearly sustainable future in light of the pandemic.

To be clear, ESG investments are still dwarfed by traditional funds in terms of size but the gap is closing and there are reasons to think it will close further. Campaigners have been gaining traction with calls for institutional investors to divest money held in industries deemed harmful to the environment, and some employers have faced pressure to ensure their pension schemes are invested along ESG lines.

It hasn’t been all plain sailing, however, and a proposed ruling in the US could hamper the expansion of ESG there. The Department of Labor has proposed a rule requiring US pension schemes to make investments solely on ‘pecuniary’ factors, and not concerns such as ESG factors. If enacted, the rule is expected to make it harder for funds to invest in ESG assets.

If progress is stalled, it is unlikely to be halted. The trend in developed nations - perhaps hastened by the pandemic - is towards intervention in sectors such as energy and vice where the public good is at stake.

For many investors, investing in ESG is now as much about future-proofing returns as it is future-proofing the planet. Investing via ESG funds is the most practical way for them to gain exposure but, if you are considering investing this way it requires proper understanding of how your chosen fund invests to ensure that you are getting what you expect in terms of ESG credentials. Some funds will only apply broad sector exclusions and invest in everything else, while others go much further and only buy assets from companies they consider to be furthering social or environmental causes.

Kames Ethical Equity is a popular ESG fund which has protected money better in the pandemic than the wider universe of UK funds. The fund, managed by Audrey Ryan, operates a screen to filter out sectors that fall foul of the fund’s ethical approach.

Ninety One Global Environment Fund takes an even more targeted approach, investing at least two-thirds of assets that the manager believes contribute to positive environmental change.

More on ESG investing

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus.  No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials.  The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered

ESG investing; Investing ideas

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