Moving into the mainstream

Asset manager Liontrust is launching a new fund to invest in sustainable businesses, giving investment company investors another option in the environmental, social and governance (ESG) space. The new issue follows other ESG investment company launches in recent months, including Schroder BSC Social Impact Trust, Downing Renewables & Infrastructure and Home REIT.

Here is a question though. Do investors really want funds with specialist ESG fund mandates like these?

At first sight, that sounds like a dumb thing to ask. The huge inflows into ESG-tilted funds – in the UK and internationally – over the past couple of years have been well-documented, with the Covid-19 pandemic widely thought to have accelerated this shift. Data from Morningstar suggests the amount of money invested in ESG funds more than doubled last year; inflows quadrupled on some measures.

Moreover, we appear to be seeing a generational shift. New research from Montfort Communications and Boring Money suggests 63% of 18-to-34 year-olds would choose a new fund manager based on its approach to ESG; the figure for the over-55s is just 17%.

However, there is a case to make that what investors are looking for today is not necessarily a fund with an ESG focus; in fact, they may simply want all investment funds to take account of ESG factors. In other words, ESG should become the default approach to managing money, rather than a specialism that investors have to actively seek out.

There is certainly a business case for that view. Why would any fund – ESG mandate or none – invest in carbon-heavy businesses that will increasingly face punitive taxes and sanctions while governments actively encourage their customers to go elsewhere? Why would investors ever want exposure to companies that turn a blind eye to human rights abuses or exploitative labour practices, given the reputational damage to such businesses when their behaviours become public?

All funds should be weighing these issues, irrespective of whether they are pursuing an ESG mandate. Indeed, regulators now require it. The European Union’s Sustainable Finance Disclosure Regulation instructs asset managers to publish details of the ESG exposures in their funds; similar regulation is expected shortly in the UK.

Similarly, financial advisers are now increasingly expected to ask clients about their ESG views as part of the fact-find process. The MIFID II regulatory reforms effectively require this.

In fact, many investment companies are already engaging with these ideas. There will no doubt be a place for new ESG funds; these provide investors with an opportunity to pursue specific interests and concerns. But more broadly, we are seeing investments companies working with shareholders to alter their mandates to bring ESG factors into their day-to-day investment decisions.

Dunedin Income Growth is a good example. It has just unveiled an enhanced ESG framework that would – assuming shareholders agree the proposals - allow it to exclude certain companies on ESG grounds. Odyssean Investment Trust has done something similar. Alliance Trust and Witan, two giants of the investment companies industry, have also embraced ESG principles over the past couple of years.

Interestingly, these changes have largely been uncontroversial and have attracted relatively little attention. Shareholders, financial advisers and investment company analysts appear to have taken the view that adding an ESG lens to the decision-making process is a perfectly natural thing for asset managers to do.

None of which is to criticise Liontrust for its new ESG fund – or any of the other recent launches for that matter. But in a funny kind of way, with ESG moving into the mainstream, these ESG launches may become less common. If every fund is an ESG fund, there may simply be less space for such endeavours.