UK investment industry faces ‘savers revolt’ on ESG

The investment industry faces a ‘savers revolt’ if it does not provide advice and products to meet the demand of investors that want to invest ethically, as the UK struggles to hold its crown as a leader in social impact investing.

Eight out of 10 investors are interested to find out more about responsible investing products, according to a survey by The Wisdom Council. That contrasts with the mere 1.3 per cent of UK retail assets under management that are in ethical strategies, according to the Investment Association.

UKSIF chief executive Simon Howard warns people will move to innovators, like robo advisers and web comparison sites, in the search for responsible investing products. “Advisers will find themselves in the middle of a savers’ revolt as they fail to meet the demand for sustainable investment options.”

However, many UK robo advisers do not yet offer ethical solutions. Moneyfarm says they are looking into it, although noted there are issues around diversification when it comes to ESG. ETFmatic chief executive Luis Rivera says they are “actively looking” at entering the socially-responsible space, but notes the universe is still small when compared to other ETFs. Wealthify says it is something their customers say they would like and it is on their “roadmap”, but with no firm timescale.

The lack of solutions for investors comes as the government tries to reestablish the UK as a leader in social impact investing with an advisory panel present its recommendations on the issue next month.

The Wisdom Council survey reveals a quarter of investors are unaware that some investment products align with their values.

Advisers take reactive approach

More advisers are investigating ESG strategies and building their own solutions, according to Natixis head of UK retail Darren Pilbeam.

However, he says: “The advisory space are perhaps more reactive, where if a client is interested they will go out and research. The discretionary side have build a ready made solution that is already on the shelf.”

Parmenion investment manager Andrew Gilbert says he has worked with advisers that adopt ethical considerations in their fact finds after one insistent client has been demanded ethical solutions.

“They realise it only takes a couple of extra minutes to consider it as part of their suitability process. Once they start asking all their clients, they’re often surprised by their response rates,” Gilbert says.

While 63 per cent of advised investors report greater awareness in ethical investment strategies compared to 54 per cent of non-advised respondents, advised clients were no more likely to invest in this area, The Wisdom Council survey found.

UKSIF’s Howard says that some of their financial adviser members have said third-party compliance services forbid them to recommend ESG products.

FE notes that many of the advisers using its service create their own portfolios for clients due to a lack of ethical model portfolios and DFM services.

The research agency is planning to launch ethical portfolios by the end of 2017.

FE research assistant Sophie Meatyard says options can be limited in some sectors, such as emerging markets, where corporate governance can be a problem and in fixed income, where ethical screening focuses on credit.

This week asset manager Candriam Investors announced the launch of Candriam Academy, a free training platform to help financial intermediaries learn about socially-responsible investing.

Parmenion offers investors four ethical approaches across 10 risk grades through a £150m multi-asset DFM service. They say AUM in those portfolios, which launched in March 2012, are doubling around every 18 months.

Gilbert says ethical decision making is entrenched in consumer behaviour, but many people don’t realise that can be applied to their pension or Isa. “You go to the supermarket and you buy fair trade bananas, you buy a solar panel, you have insulation in your loft when you come home, you recycle your milk cartons.”

Ethical fund options

EdenTree, WHEB and Impax are among the fund houses leading the pack for responsible investing. But Liontrust is also making a push in the space through its purchase of Alliance Trust Investments.

Parmenion’s Gilbert also lists Kames, Rathbones, BMO GAM, Jupiter, Troy, and M&G among mainstream managers offering a solid line up of products.

Tilney Group managing director Jason Hollands lists Standard Life UK Ethical, Kames Ethical Equity, F&C Responsible Global Equity and Jupiter Ecology among responsible funds he likes.

He notes that underweights to sectors like commodities can skew ethical funds’ relative performance over short periods. They can often also skew towards small and mid-cap companies as large caps may have one area of their business that does not meet fund criteria.

FundCalibre director Juliet Schooling Latter adds that she likes EdenTree Amity UK, managed by Sue Round, and Bryn Jones’ Rathbone Ethical Bond fund.

She says headlines regarding US president Donald Trump and Sports Direct’s corporate governance failures show environmental and social issues are front of mind, but admits they struggle to gain traction amongst UK retail investors.

Restoring trust in the City

Offering ethical options to investors is a way to restore trust in the industry following the global financial crisis, according to Aberdeen Standard Investments head of responsible investing Amanda Young.

“For millennials as a whole the financial industry is not trusted and we need to build that back up.“

In November recommendations will be presented to the Government about how to reestablish the UK as the leading centre for social impact investing.

AllianzGI deputy chair Elizabeth Corley, who is leading the advisory group, says social impact investing is not yet trusted to the degree it needs to be by the investment industry and its clients.

But she says: “There’s a big question out there at what point do we reach a tipping point where it becomes bad advice not to think about the long-term risk factors that might affect a company’s brand, sustainable financial performance and reputation amongst their customers.”