Investment incoming: the arena where inflows show no sign of drying up

Amid the outcry over single-use plastic and with 2019 being named year of the vegan, retail investors now own 25% of the assets held in sustainable funds, up from 11% in 2012.

Everywhere you look there is evidence that people are becoming increasingly concerned with environmental welfare. Voluntarily using a plastic straw today would be typically frowned upon, and protests have forced many major corporations to ban supplying and stocking them. Vegetarians and vegans are soon expected to make up a quarter of the global population, with 2019 being coined the ‘year of the vegan’. 

As such, even in the financial sector consumers are increasingly demanding products and services from sustainable sources. ‘Sustainable’ is an important word in the world of investment right now, and investors are more likely than ever to put their money into companies that focus on having a positive impact on the environment and society.

Ethics has entered mainstream investment thinking

Inflows on the up

The momentum behind sustainable investing is evident in the volume of capital flowing into funds that service this space. Sustainable investment is one of few sectors that have experienced major inflows of late; indeed, the latest Global Sustainable Investment Review notes that sustainable investing assets increased by 34% between 2016 and 2018 across Europe, US, Canada, Australia and Japan. Fund houses are keen to capture these inflows, with 305 new sustainability funds launched globally in 2018 and 168 in the first six months of 2019.

As inflows into these funds continue to build, more and more capital is chasing a relatively limited number of underlying investment opportunities. The result is that companies with strong sustainability credentials are experiencing share price growth. The MSCI KLD 400 Social index, comprising companies with strong sustainability profiles, has outperformed its benchmark, MSCI USA IMI index, since it was launched in 1994. The outperformance has increased as momentum has risen.

Interestingly it appears that retail investors are driving a lot of this momentum. Back in 2012, retail investors owned 11% of the assets held in sustainable funds. This proportion has now grown to 25%.

With such a wealth of sustainable funds to choose from, the biggest challenge is picking the right one. BlackRock, the world’s largest asset manager and owner of the iShares series, has made clear its intention to position itself at the forefront of socially responsible ETFs. Its launch of the iShares ESG MSCI USA Leaders ETF in May of this year was one of the most successful fund launches in history, and the fund already holds $1.6 billion (£1.3 billion) in assets.

While many ETFs in this space have performed well, investors may wish to bear in mind that ETFs will generally only focus on quantitative measures of sustainability. An active manager, on the other hand, would be able to consider additional qualitative factors such as corporate culture and company values.

To put this into context, Tesco was previously a constituent of many ethical investment indices before the 2014 accounting scandal that unearthed the company’s longstanding mistreatment of its suppliers and saw its shares fall 11.5% to an 11-year low. Treatment of suppliers is arguably a culture issue that is difficult to pick up through a quantitative screen.

For those preferring an active approach, Liontrust offers a whole host of highly regarded sustainable funds. The Liontrust Sustainable Future Global Growth Fund has achieved an annualised return of over 20% over the last five years.

Do investors have to choose between green and greed?

Investment trust specifics

The London Stock Exchange is also home to a number of investment trusts focusing on more specific areas such as renewable power. Greencoat UK Wind, an investment trust with a focus on wind farms, has now achieved a market capitalisation of over £2 billion following a successful £375 million capital raise earlier this year.

Like many of its peers, Greencoat trades on a fairly sizeable premium (currently 14%). It is usual for infrastructure-focused investment trusts to trade on premiums due to their attractive yields, but the premiums are notably higher for those with an emphasis on renewable energy, which is further evidence of the momentum behind this theme.

Companies are fast realising that their shareholders and their customers want sustainability, and therefore are taking steps to improve their sustainability credentials.

Many have readily signed up to the United Nations Global Compact, which is a voluntary initiative requiring firms to adhere to 10 principles covering human rights, labour, the environment and anti-corruption, and to produce regular reports detailing their ongoing efforts. The momentum behind sustainability is making the world a better place.

Rachel Winter is associate investment director at Killik & Co.

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