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The opinion polls all point in one direction — investors increasingly say they want sustainable investments. But wealth managers report that actual growth is slow, raising questions about how much demand there is for sustainable products.
The headline figures for sustainable investing, which take into consideration both financial returns and social impact, seem strong. UK ethical funds had their strongest sales since 2007 last year, with £460m flowing into the products, more than double 2013’s inflows, according to the Investment Association. The number of ethical funds registered for sale in the UK, meanwhile, has also soared, jumping by almost 60 per cent since 2009, Lipper figures show.
Bill O’Neill, head of the UK investment office at UBS Wealth Management, says: “We are increasingly getting questions about [sustainable investing] and how we could incorporate it into clients’ investment strategies.”
A recent poll by crowdfunding platform Abundance Generation found that seven out of 10 Britons said they wanted to invest in things that gave a good return and did not harm people’s future.
The young and the very wealthy are particularly taken with the concept, says Leslie Gent, managing director at Coutts. “The next generation of clients are a lot more interested in [environmental, social and governance] investing.”
But dig a little deeper and the numbers for sustainable investing look less impressive. Assets managed in ethical funds as a percentage of the overall UK funds industry has remained fairly stable since the financial crisis at just over 1 per cent, IA figures show. Ethical funds currently make up just 2.07 per cent of the total number of mutual funds registered for sale in the UK, down from about 2.35 per cent in 2009, according to Lipper.
Matt Phillips, managing director of Thomas Miller Investment’s wealth management arm, says a lack of suitable products is hindering growth. “We are seeing more clients show interest in [sustainable investing]. The problem is actually finding the right investments to go into.”
Jason Hollands of Tilney Bestinvest says: “[Social responsible investment] funds open to retail investors are largely clustered in the UK equities, global equities and investment grade corporate bond space, as well as certain niche environmental or renewable energy funds, but investors are presented with major gaps when trying to build a truly diversified portfolio.”
Wealth managers such as Coutts, UBS and Rathbone Greenbank Investments try to circumvent this by focusing heavily on individual stock picking, screening out so-called sin stocks and finding companies with good environmental, social and governance credentials, as well as seeking green opportunities, such as renewable energy or water projects.
Claudia Quiroz, investment director at Quilter Cheviot, part of Old Mutual Wealth, says concerns around performance are also curtailing sales of sustainable investments. On the funds side, sustainable products have historically been aimed at institutional investors, with a long equity-only strategy and offered exposure primarily to small- and mid-cap stocks, she says.
“As a result, private individuals . . . experienced significant volatility of returns in the short to medium term when compared to the typical retail fund,” she says. However, this is now changing, with a growing number of funds being developed with individual investors in mind, Ms Quiroz adds.
UBS research, meanwhile, suggests that over the long term, sustainable investing is typically either neutral or more positive for performance compared to conventional investing.
Despite slow uptake currently, wealth managers expect sustainable investing to grow in popularity. Products they rate include the Kames Ethical Equity, Standard Life UK Ethical, Alliance Trust UK Ethical and the Alliance Trust Sustainable Future Global Growth funds.
Ethical bond products from Kames and Standard Life are recommended by wealth managers, as is the Royal London Ethical Bond. On the passive side, they give the nod to the Vanguard SRI Global Stock GBP exchange traded fund, or UBS’s range of ethical index funds.
However, while the number of ethical funds available is on the rise, it appears investors are reluctant to embrace the concept until there is more evidence of strong returns and a broader range of products available.
This article has been amended to reflect that the F&C Responsible Global Equity fund is not a passive fund, as was stated in the original.
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