Private Clients Embrace ESG Funds with Fresh Approaches to Enhance Returns

Wealth managers report a renewed interest among clients in sustainable investment funds, driven by better understanding, lower valuations, and improved regulation.

Post-pandemic, demand for these funds waned as high-performing oil and gas stocks and rising interest rates made it difficult for them to outperform.

In a survey by Savanta for the FT’s private client wealth management edition, 12 out of 26 wealth managers expected investor interest in environmental, social, and governance (ESG) strategies to increase over the next year, while seven anticipated it would remain the same, and only one predicted a slight decrease. Vermeer Partners, the lone dissenter, suggested investors might seek higher-risk alternatives to recover losses and prioritize philanthropy.

Despite positive expectations, global investors have withdrawn a net $40bn from ESG equity funds between January and April, according to Barclays research, marking the first year of negative trends. However, by May, net monthly inflows into ESG funds turned positive again for the first time in six months.

Wealth managers believe ESG investments will perform better as the global economy recovers. This is a shift from the recent past when sustainable funds lagged due to underweight positions in oil and gas stocks and an overweight in growth stocks like tech companies, which had a rough 2022 but rebounded last year.

Tom Buffham, portfolio manager at RBC Brewin Dolphin, noted that renewable companies are trading at their lowest valuations since before the pandemic, potentially making them attractive for long-term investors.

Paris Jordan, head of responsible investing at Charles Stanley, observed a resurgence in sustainable investment interest after a challenging period in 2021 and 2022. She mentioned that new sustainability labels from the FCA later this year would help clarify available products. Charles Stanley’s clients are now more interested in diversified strategies, including engagement rather than merely excluding certain stocks.

Wealth managers stress the importance of long-term investments in sustainable strategies. Mariella Rice-Jones, responsible investment lead at Brooks Macdonald, highlighted that the transition to a sustainable economy is inevitable, and clients understand this. She emphasized the broad investment opportunities in energy transition and decarbonization.

Melissa Scaramellini, fund research analyst at Quilter Cheviot, noted attractive long-term opportunities in sustainable themes like energy transition and healthcare, given lower valuations and structural drivers. She advocated for pushing companies to address their environmental and social impact and recommended LGIM’s Future World range of passive funds as exemplary.

However, some wealth managers, like Gene Salerno, chief investment officer at SG Kleinwort Hambros, believe client interest in ESG-specific investing has waned, partly due to the risk of underperformance and the mainstreaming of ESG considerations in portfolios.

The Investment Association’s April statement that defense stocks are compatible with ESG considerations reflects this evolving interpretation, as long-term sustainable investment aims to support all sectors and companies in the economy.

William Buckhurst, investment director at Vermeer, noted that some clients are adopting a more pragmatic approach to such investments, recognizing that different clients have different concerns.

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