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The pandemic has led to an upsurge in disruption and dislocation in global markets leaving an investment landscape that is dominated by extreme volatility. However, these conditions have led to an upsurge in interest in ESG investing with investors deploying capital into the sector on an unprecedented level.

ESG: Achieving Active Outperformance

Ketan Patel Ketan Patel Fund Manager
Opinion

ESG: Achieving Active Outperformance

Ketan Patel

Ketan Patel
Fund Manager

The pandemic has led to an upsurge in disruption and dislocation in global markets leaving an investment landscape that is dominated by extreme volatility. However, these conditions have led to an upsurge in interest in ESG investing with investors deploying capital into the sector on an unprecedented level. Whist the E has always been the favourite child of ESG investing, it is the increased focus on the S, in particular on inequality and social justice that has risen to top of the agenda during the pandemic. The surge has coincided with a debate over active vs passive investing and also more importantly on investment performance, both areas on which ESG investing is leading the way.

Why active? – Engagement and Voting

The debate in mainstream investing over active vs passive has been driven very much by fees and a race to the bottom. Whilst ESG funds are not immune to the trend towards more for less, there are two main factors why active management in ESG will continue to thrive. Firstly, only active managers can engage on the issues that are important for their clients and secondly, active managers play a key role in exercising proxy voting ensuring that the interests of shareholders are represented. Both engagement and voting are platforms from which investors can influence how businesses impact the environment and communities in which they operate. Whilst passive solutions have a role to play in markets, they are derived from instruments that are unlikely to allow ESG investors to align their values with investment returns, as they don’t engage with companies or vote proxies.

On average 1 in 5 funds in the UK All companies sector that are screened are 1st quartile over 3, 5 and 10 years. In fact, over the 3 year period, the top 2 funds are screened and this stellar track record begs the question as to why UK screened funds have done so well. 

ESG: 1st Quartile Performance

The age old accusation that investing in ESG funds resulted in investors having to give up performance for values has well and truly been dismissed. A review of the most competitive sector, the UK All companies, reveals that 1 in 4 of the top quartile funds are screened over the 12 months to April 2020. The breadth of the screened offerings includes ethical, responsible, sustainable, impact and environmental funds, allowing for investors to build diversified portfolios that reflect their values. However, what is impressive is that the outperformance of the screened funds goes beyond 12 months. On average 1 in 5 funds in the UK All companies sector that are screened are 1st quartile over 3, 5 and 10 years. In fact, over the 3 year period, the top 2 funds are screened and this stellar track record begs the question as to why UK screened funds have done so well.

ESG: Strong Tailwinds 

The long-term tailwinds gathering strength augur well for ESG investing with a greater focus on the role that companies will play in mitigating climate change and delivering social justice. Investors of all persuasions will be holding company management to greater account than ever before through engagement and proxy voting. The outperformance of ESG funds is a key catalyst in bringing about a long overdue change, busting the myth that ESG investing is only for the minority who can afford to give up financial returns, whilst holding true to their values. The long term outperformance in UK ESG funds means that investors can now enjoy superior returns whilst investing in companies that are making a positive contribution to both society and the environment.