In 2002, Craig Mackenzie invested his ISA in a BlackRock environmental, social and governance issues (ESG) fund, and within a year his savings had dropped by 80%. Six years later and his investment is just about approaching its original level. But Mackenzie, who is director of the Carbon Benchmarking Project at Edinburgh University, and an ESG consultant for Hymans Robertson, has no regrets.
“You wouldn’t want to put all your pension in a climate change fund, but if you are going to invest in equities you have to accept some risk. However, I am absolutely confident that over 20 years these funds will perform very well,” he says.
“Timing is everything; if I had invested a year later I would have doubled my money.”
The traditional view of ESG or socially responsible investment (SRI) has been one of compromise: conscience-burdened investors having to forgo chunky returns for the warm inner feeling that their investments were not being used to manufacture napalm.
But investors now no longer worry about settling for lower returns in order to satisfy their scruples. Fund management style has changed so that investors are moving away from blocking out companies involved in certain practices and are looking to engage with them.
This has led to confusion among fund managers and investors over what to call the strategy. A recent Axa survey of 350 investment professionals revealed ‘ESG’ and ‘sustainable’ were the top choices for descriptions of investment styles. But among pension funds, SRI is still favoured due to its association with the UN Principles for Responsible Investment (which table two on p.28 reveals all the respondents are signed up to, bar State Street).
The largest growth area for this kind of investing has been climate change funds. While climate change-specific funds do not fit into the classic SRI model, the increasing acceptance that the environment is under threat from human activity (thanks in no small part to front pages of The Independent) has meant more general SRI funds have received greater interest.
Table three (p31) shows the demand for each providers’ funds over the past year. Three of the nine respondents reported a substantial demand for ESG engagement, while five reported a substantial demand for specialist ethical and environmental funds.
Last month’s collaboration between a number of the world’s largest pension funds – including the UK’s Universities Superannua-tion Scheme – showed the climate change campaign is being taken on by pension funds. The group, dubbed P8, was brought together by Prince Charles, who said at the time: “Pension funds have a unique role to play because of their ability to place vast sums of money into projects that have longer investment periods than that which most of the private sector is prepared to tolerate.”
Ann Ellis, head of sales and marketing at Cowen Asset Management, which runs its own climate change fund, says the group sent a “strong message to the market” that climate change issues are on many schemes’ agendas.
“We are finding there is a lot of interest in the UK and it is running side by side with the US,” she says. “The Stern report gave a huge boost to the climate change movement, and the Bali roadmap in December has really driven the investment theme forwards.”
Lord Stern’s 2006 report predicted the value of the low-carbon energy market would be $500bn by 2050, so it is no wonder many funds have seen the green light. Emma Howard Boyd, head of SRI and governance at Jupiter, says the company’s green fund managers believe they are “currently seeing the most interesting juncture in 20 years in terms of green investing”, despite economic volatility. She says this is due to attractive valuations and a huge uplift in activity and interest.
According to Howard Boyd, there are three key drivers for this: governments taking more action, consumers demanding sustainable products, and businesses looking to exploit this opportunity. She describes this triumvirate as all being positively engaged and forming a virtuous circle.
A telling example of this is the recent furore over plastic bags. Campaigners highlighted the impact plastic bags have on the environment, which was picked up by the media. Sensing a shift in public mood, politicians were soon trying to score points over the issue and before long, high street names such as Marks & Spencer were in on the act.
International agreements on climate change quotas like the Bali roadmap, and the fallout, have not been lost on William Page, chair of State Street’s SRI team, who believes investments could be directly affected. “Potential legislation may include incentives for the development of environmentally sustainable products and services across the economy. Not only is there a need to respond to and combat the effects of climate change, there is also a need to adapt,” he says.
