The evidence that fund managers across Europe have switched their attention to the sustainability of their stock picks grew this week, this time with research revealing proof of the strategic shift—and also performance.
According to a report from Morningstar, a provider of investment analysis services, more than a third (34.1%) of sustainable funds finished in the top quartile of performance while almost two-thirds (63%) were in the top half. Only 14.8% were in the bottom quartile.
The figures not only lend credence to the idea that sustainability is a key indicator of investment performance but also a key issue for boards as they manoeuvre their companies to win capital backing.
Morningstar concludes that the number of sustainable funds are growing and that conventional funds are increasingly adjusting their criteria to include sustainability factors.
“Sustainable investing has gained popularity in recent years and is fast becoming a mainstream pursuit,” says the report. “Whether to mitigate risk, identify opportunities, or align values, more investors—institutions and individuals—are incorporating environmental, social, and governance factors into their investment decisions.”
Morningstar found that in the first half of 2019, 168 new sustainable funds were launched, compared with 305 for the whole of 2018. Assets in sustainable funds reached €595bn, boosted by record inflows over the period of €36.9bn.
But there is clear evidence that “sustainability” is not just about specialist funds. According to Morningstar: “A growing number of conventional funds are incorporating ESG factors into their investment processes, as evidenced by the increased frequency of ESG language in prospectuses and factsheets.”
A global shift
Europe is not alone in this movement. According to figures from Principles for Responsible Investment, there may be more than US$1.3trn currently committed to impact investment worldwide.
Fiona Reynolds, chief executive of PRI, wrote in Board Agenda earlier this year that this was partly to do with the changing profile of wealth distribution to women and millennials.
“Social impact investing offers financial exposure to the many organisations that carry out socially valuable activities, from providing clean water to fighting poverty and encouraging healthier lifestyles,” she said.
However, the pressure for sustainable investment, and the resulting squeeze on boards to have sustainable business models, may come from regulators. The EU in particular is working on a sustainable finance action plan. Focused mainly on tackling climate change, the action plan has worked on improvements to climate change risk reporting and a taxonomy of sustainability.
Elsewhere, politicians have levered pressure, in particularly through the Task Force on Climate-related Financial Disclosures, which now closely monitors how many companies are reporting according to its guidelines.
While Morningstar concludes that the sustainability offering from fund managers has now become extensive and will only expand, it also worries about a lack of information in the “prospectuses, factsheets and key investor information documents”.
“The language used in these documents is often unclear and lacks standardisation,” the report says. Naming a fund “sustainable” is not a reliable guide to whether its underlying approach uses ESG criteria or to what extent. Some of the sustainability talk may just be window dressing rather than substance.
Lastly, Morningstar points out that policy makers will continue to take steps to “increase the role of financial markets and products in meeting macro ESG goals”.
The investment industry is swinging steadily behind sustainability investment, even if the definitions are yet to be standardised. Boards would do well to take heed.