Huge demand for ESG funds fuels equity investments

The research showed that $84 (£60.52) out of every net $100 invested in equity funds has gone into ESG funds, totalling $15.1bn out of $18.1bn invested since 2019.

UK and European investors have been the most active buyers of ESG funds.

Calastone said that although ESG funds have played a key role in keeping active equity funds topped up in the face of growing competition from passive products, active equity strategies saw net outflows of $5.4bn over the past two years amid a global shift away from active to passive funds.

By contrast, index funds captured inflows of £23.5bn in 2019 and 2020, Calastone’s data showed.

Anna Rudgard, consultant at Aon, told Pensions Expert that increased regulation is placing greater responsibilities on pension fund trustees in relation to responsible investment.

She said that in Europe, regulations have been brought in to ensure the integration of financially material ESG factors into investment decision-making.

“Trustees now need to consider how to assess financially material risks and how to take action. At the same time, there’s also the desire from pension fund members, who are increasingly wishing to see their values reflected in their pension fund investments,” she added.

Coupled with the growth in interest in ESG investing is a shift away from actively managed strategies driven by high fees, pension funds derisking and a perceived failure on the part of some active managers to deliver on their return promises, Rudgard said.

“For the industry, I think this underscores the importance of having strong investment manager due diligence for active ESG or non-ESG strategies,” she said.

“Manager skill may deliver better returns and also help mitigate downside in falling markets — as well as identifying those strategies most successfully integrating ESG risk factors. But this is provisional on selecting the right manager.”