Sustainable and ESG-focused funds “must be core part of portfolios now”

Sustainable and ESG-focused funds should sit at the heart of investors’ long-term portfolios now, with the seismic shift seen towards such mandates in recent years unlikely to be reversed, Adrian Lowcock at Willis Owen has said.

Lowcock, head of personal investing at Willis Owen, noted the investment style had outstripped non-ESG approaches in the last one, three and five years, with a five-year return of 94.6% for the MSCI ACWI ESG leaders index versus the MSCI ACWI index return of 91.3%.*

While they may have been satellite funds in the past, meeting the desire of some individuals who wanted to invest in line with their ethics and principles, Lowcock says these are no longer “nice to have” investments.

“These funds are core holdings now. Whereas previously, ESG was a secondary consideration, a nice to have tilt to portfolios, the world has been changing. A focus on companies which do less harm to the environment, be that alternative energy, greener food production or waste reduction, are here to stay, and crucially, they are being rewarded by investors,” he said.

“Clearly the COVID pandemic has certainly accelerated an existing trend, as people took lockdown to revaluate their lives and could witness first-hand the effect human activity was having on their local environment.

“But the key now is whether these sectors, such as oil and airlines, come back to the fore – that’s very unclear at present, unlike the desire to use non-carbon or low-carbon energy, for example.”

Lowcock believes the outperformance of sustainable, ESG and ethical funds will continue from here, with many of the old-guard old economy stocks likely to struggle unless they change.

“ESG investing is now a huge part of investing common sense, with many areas that responsible and ethical funds avoid being invested in “old” economy industries in decline. The development of the 4th digital age is also supporting progress in ethical investing as new technologies make opportunities more cost effective, and the use of data means companies can better track the impact they have and also be more accountable for their behaviour.

“These trends are not one, three or even five-year ones. They are here to stay, and investors who are not on board with them are going to miss out over the long-term.”