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UK investors pulled money out of so-called responsible funds at a record rate, as the market adjusted to the view that interest rates would stay higher for longer and ESG lost its shine in a more volatile market.
Responsible investment funds registered a record outflow of £544mn in September, meaning investors have withdrawn more than £1bn so far in 2023, according to figures from the Investment Association.
Responsible funds, which take into account environmental, social and governance factors in investment decisions, saw huge inflows between 2018 and 2021 on the back of a wave of enthusiasm for thematic investment and ESG.
These funds performed well before and during Covid as they were often focused on high-growth stocks in the developed world and avoided the energy and travel companies hit hard by Covid restrictions.
But since the end of pandemic restrictions, they have struggled as growth companies were buffeted by rising interest rates, energy stocks have boomed and ESG investing has faced a political backlash in the US. Analysts at Deutsche Bank attributed Europe-wide ESG underperformance to “surging rates and the energy crisis”.
Data compiled by analysts at Jefferies suggests that a lower percentage of ESG-labelled funds than non-ESG labelled outside the US have outperformed their benchmarks from 2021 onwards.
Analysts also suggested that the UK’s cost of living crisis was putting pressure on DIY investors, who withdrew some £1.4bn from funds overall in September — the biggest monthly outflow in 2023.
“Investors continue to be squeezed by inflationary pressures and the cost of living, as net inflows into funds experience their second quarter of decline,” said IA chief executive Chris Cummings.
Elsewhere, investment continued to flow out of money market funds and fixed income funds, with over £300mn withdrawn in September. UK gilts had inflows of £237mn, while investors bought over £200mn of corporate bonds.
UK equity funds continued to be the single worst hit sector in terms of outflows, with UK all-companies funds recording almost £900mn in outflows in September.
Other analysts maintained that even as recent statistics show outflows, UK investors will punish companies that fail to uphold responsible standards.
“ESG-related factors are a priority for Hargreaves Lansdown investors when making investment decisions,” said Emma Wall, head of investment analysis and research at the platform.
“Deforestation and corruption are big no-nos for portfolio inclusion, and 70 per cent of our investors consider climate change ‘extremely’ or ‘very’ important when making investment decisions. The message to companies is clear: transparency, ethical behaviour and good governance practices are essential in attracting and retaining investors.”
Deutsche Bank analysts said the question of whether responsible investments outperformed had yet to be resolved. “The debate about whether sustainable investments do outperform non-sustainable investments in terms of returns remains unsettled and likely dependent on selected time periods and subject to exposure nuances,” they wrote in a July note.
“Still, they could be an attractive asset in portfolios if they provide a diversification advantage by being decoupled from non-sustainable investments.”
