Supporting international client demand for responsible investing is now more important than ever

THE once-niche market for environmental, social and governance (ESG) investments is exploding, and the outbreak of Covid-19 could prove to be a major turning point for accelerating client interest.

Andrew Shepherd, CEO of Brooks Macdonald's Channel Islands-based international business.. (29190656)
Andrew Shepherd, CEO of Brooks Macdonald's Channel Islands-based international business.. (29190656)

Guernsey and Jersey have both set out to establish themselves as expert centres for supporting responsible investing. Guernsey launched the world’s first regulated green fund product in 2018 and Jersey Finance announced earlier this year that it intended to set out a long-term vision for sustainable finance. The opportunity to support this explosion among international investors continues to grow.

Sustainable funds attracted record inflows in the first quarter amid the market turmoil, according to data from Morningstar, and many of these funds are outperforming the broader market for the year.

At our recent Connected webinar, we asked the 188 adviser attendees whether they thought the current pandemic would speed up a transition to a greener, more equitable society. The response was unequivocal, with 90% saying yes.

This poll chimes with research by global fund data provider FE fundinfo. It found that 55% of IFAs increased the amount of client money in ESG investments in 2019. And more than four-fifths of advisers expected demand for ESG options to rise in the coming year.

Morningstar figures have borne this out. Investors poured a record €120bn into sustainable investment options in 2019, while flows in the second quarter of 2020 more than doubled to $54.6bn compared to the same period the year before.

The 2015 Paris Agreement was a historic turning point in the fight against climate change. Considerable public and corporate policy has since been directed towards restricting greenhouse gas emissions. This is evidenced by the numerous commitments to become net-zero between now and 2050, and the EU’s ‘Green Deal’ focus on clean energy, transportation and smart infrastructure. Meanwhile, consumer demand for ‘green’ products and services continues to flourish.

The pandemic has reinforced these trends. As DWS strategists observed in a recent research note, country lockdowns have ‘shown the ways in which the world can adapt without many of the carbon-intensive activities enjoyed before the crisis’.

Companies with a focus on sustainability and digitalisation are set to benefit. ‘Old economy’, fossil-fuel-dependent corporations face being saddled with stranded assets and soaring capital costs.

But it is not just the ‘E’ in ESG that is receiving the focus. The pandemic and Black Lives Matter movement have amplified attention on the ‘S’ and ‘G’, putting diversity and social equality (including employment conditions and healthcare) centre stage. This focus has translated into more shareholder votes on social proposals and greater success, according to Morgan Stanley analysis.

Such an emphasis can have a major impact on the bottom line. In a 2018 white paper with the University of Hamburg, DWS found that corporate reputation had the strongest positive correlation with financial performance. ‘Consequently, how companies respond and support their employees and customers during the pandemic could have important implications for company performance,’ said the strategists.

History is already showing the performance benefits investors can achieve with an ESG-oriented strategy, and the investment case will only get stronger with time. Once seen as a values-versus-performance trade-off, evidence now shows investors can enjoy strong investment returns at the same time as supporting businesses that are contributing to a more sustainable planet.

Morningstar data examining almost 5,000 Europe-based funds revealed close to 60% of sustainable funds had done better than their non-ESG peers over one, three, five and ten years.

There’s no doubt that ESG is the hottest topic in the investment industry at the moment, so it is vital advisers start engaging with clients on responsible investing.

Given Guernsey and Jersey’s commitment to establishing themselves as centres of excellence for sustainable finance, the Channel Islands are in a strong position to support the drive for responsible investment solutions among international investors.

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