Environmental, social and governance (ESG) funds have made a big splash in the investing arena in the last couple of years.
As public awareness of businesses’ environmental and social impacts has grown, more investors have chosen to invest in companies that, in addition to promising a reasonable return, also make a positive difference in the world. This has led to significant growth in ESG investments.
However, new data released by Hargreaves Lansdown shows that net flows to ESG funds have recently taken a significant dip. So, what’s the root cause? Is this just a temporary dip, or have people lost interest in ESG investing?
Let’s take a look.
[top_pitch]
What is ESG investing anyway?
ESG investing is a type of sustainable investing that takes into account a company’s environmental, social and governance factors in addition to traditional financial metrics.
ESG funds invest in companies that, in addition to having a high potential for financial returns, also have a strong focus on the environment, social responsibility, and corporate governance.
The environmental aspect considers whether a company has a positive or negative impact on the environment. The social aspect examines how a company interacts with and supports its internal and external stakeholders (such as employees, clients, and communities). And the governance aspect focuses on how the organisation is run or managed.
What’s happening with ESG funds?
According to Hargreaves Lansdown, January saw net flows into ESG funds plunge 115% compared to the year before. This marks the first month of negative flows to ESG funds since March 2020.
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, attributes the fall to market turbulence. One of the factors behind this turbulence is fear of an interest rate hike.
For example, Wall points out that the Nasdaq index of US tech stocks has “recorded its worst month since the pandemic slump in March 2020, as investors took gains and instead sought out stocks such as financials, which tend to benefit from higher interest rates”.
She adds “ESG funds were caught up in the style rotation as the appeal of growth-orientated names waned.”
What does this mean for the future of ESG funds?
Despite the fall in ESG flows in January, Wall believes that the ESG investing movement is far from over.
She explains, “January 2021 was a record-breaking month for flows into responsible funds on the Hargreaves platform, so January 2022 always had a high bar to beat. Last month was also a choppy month for fund flows across all sectors, as investors sought to make sense of the higher-rate outlook.“
According to Wall, the growing popularity of responsible investment funds will be a structural shift rather than a faddy trend.
“While there may be months where flows slow, assets under management are likely to grow steadily over time,” she says.
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Is ESG investing still worth it?
As Wall mentions, the plunge in ESG fund inflows in January isn’t indicative of a long-term shift from ESG investing.
But are ESG funds actually still worth investing in? Can you still profit from this kind of investing?
The short answer is yes.
Previously, investors may have been discouraged from ESG investing due to a belief that responsible investing means sacrificing returns. However, growing research indicates that this isn’t true. ESG stocks tend to do just as well as, or even better than, non-ESG stocks.
A Refinitiv report shows that ESG funds have outperformed conventional funds over the past three and five years.
The report found that over three- and five-year periods, ESG investments outperformed non-ESG investments by between 13.2% and 35% across the top three selling sectors (Equity Global, Equity UK and Mixed Asset GBP Balanced).
Of course, bear in mind that past performance is not a guarantee of future results.
How can you get started with ESG investing?
Still interested in having your money or investments make a positive impact on society and the world at large? It’s very simple to get started with ESG investing.
All you need is a share-dealing account that gives you access to ESG funds or stocks. If you don’t have one already, the Motley Fool has compiled a list of top-rated share dealing accounts to help you narrow down your options.
The post Why are investors ditching ESG funds? appeared first on The Motley Fool UK.
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