Most investors prioritise performance, charges, the manager and a fund house’s reputation over ethical issues when picking investments, new research reveals.
Women and under-45s are most likely to consider ‘ESG’ – environmental, social and governance – factors when investing, and one in four people would rank them as the most important or joint top concern.
Among the third of investors who disregard these matters, most said they put performance first, or that they were supportive but found such investments harder to research, according to the survey by the Association of Investment Companies.
Responsible investing: A new wave of cash went into funds as the UK prepared to host COP26, the UN gathering on climate change currently taking place in Glasgow
The findings follow a fresh surge of money into this sector, as the Investment Association said that in September two thirds of total fund inflows from private investors, or £1.6billion out of £2.3billion, went into responsible investment funds.
There is a strong tailwind behind the sustainable investing movement in particular, as governments, big institutions and individual investors plough increasing sums into projects to combat climate change.
Meanwhile, even though shares in fossil fuel firms are still buoyant, and throwing off dividends due to higher oil prices, they could struggle in the longer term.
Campaigners are pressing more pension schemes to sign up to ‘net zero’ carbon emission targets, and one of them, former Bank of England government Mark Carney, has warned investors who don’t divest from fossil fuels could eventually find them ‘worthless’.
This is because experts say most fossil fuels assets will need to remain untapped to avert a clinate disaster.
‘If we were to burn all those oil and gases there’s no way we would meet carbon budgets,’ said Carney. ‘Up to 80 per cent of coal assets will be stranded, [and] up to half of developed oil reserves.’
What do you consider when choosing investments
Investors ranked each issue on a one to five scale, where five meant very important and one meant not at all important (Source: AIC)
The AIC survey of attitudes on responsible investing found that among those investors who do not take it into consideration, 57 per cent agreed with the statement: ‘I prioritise performance over ESG issues’.
The same proportion agreed with the following: ‘I am supportive of ESG investing, but I find these investments harder to research’.
Some 27 per cent said they did not trust asset managers’ ESG claims, and 22 per cent that they had not thought about the issue.
When it comes to performance, investors are divided with 33 per cent believing that keeping ESG considerations in mind is likely to improve their returns, 20 per cent thinking this is likely to have a negative impact, and 29 per cent believing it would make no difference.
Meanwhile, 20 per cent believe putting money in ESG investments is likely to be lower risk, 23 per cent say it will be higher risk, and 43 per cent think it will have no impact.
But most investors think investing responsibly means their costs will be higher. Just 10 per cent believe it will mean lower charges, while 43 per cent say it will lead to higher charges, and 36 per cent think it won’t affect charges.
Annabel Brodie-Smith, communications director at the AIC, says: ‘In reality, fund charges depend on the kind of ESG investing you’re doing.
‘Sourcing and buying private assets like wind farms will be expensive, and that’s reflected in higher fund fees, but if you’re investing in public companies that have green credentials the charges will be lower.
‘The broad spectrum of funds that might be described as ‘ESG’ makes it hard to generalise, but it’s fair to say that ESG investing is not necessarily more expensive.
‘As ever, investors need to do their research and compare ESG funds to others that do a similar job.’
What type of ESG fund appeals most to investors?
Investors ranked funds on a one to five scale, where five meant very appealing and one meant not appealing at all (Source: AIC)
On the most preferred types of responsible fund, 22 per cent favour those which actively include investments that make a positive impact.
Some 21 per cent find funds that exclude investments harming the environment or society appealing, while 14 per cent like funds that integrate ESG concerns into the investing process but don’t rule out anything in particular.
The AIC surveyed around 450 private investors, who were mixed in terms of age, gender, investable assets and location. It also carried out follow-up interviews with a some of those who took part.
Brodie-Smith says: ‘ESG has never been a hotter topic within the investment industry, but this research provides a reality check by showing how much it matters to the average investor.
‘Private investors do care about ESG issues, but some care more than others, and there is still a lot of confusion about funds’ ESG claims.
‘Investors also have different priorities when it comes to ESG, which are complicated and sometimes competing.
‘This year we have launched ESG disclosures on the AIC’s website, so that investors can look up the strategies and policies of investment companies.
‘As company activity, regulatory requirements and investor demand evolve, we will work with the sector to develop these disclosures to ensure they provide investors with useful information to guide their decision making.’
What do investors say about ethical investing
The AIC compiled the following quotes from people it surveyed.
What’s your view of ESG investing?
Probably the future and a good thing to invest in. But basically it is considering the future of the world when it comes to investing, rather than just to make money, full stop. Male, 46
There seems to be lots of different approaches to ESG (ethical, sustainable, growth/green?) that I’ve seen. Some seem to allow oil companies in but with less percentage weighting. Others exclude entirely (I personally prefer this approach). I’m still confused around SRI and ESG and the key differences (if any) between them. Non-binary person, 27
It’s a bit of a feel good thing, if you invest in ESG – then you won’t feel as guilty if you are conscious of it. The thought that you are investing in something which is positive for the world… If you can get a good return, it’s a tangible benefit as well. Male, 26
Greenwashing seems to be what ESG is now about. Spurious claims about companies, because they are easy to make and add PR spin, but in my view, ESG is the way we are all going to go – but well run honest companies run for their owners and staff seem much more admirable concerns than ‘bandwagon’ followers of fashion. Male, 66
It’s ultimately about likely future return, I’ve got funds in solar and wind infrastructure, funds in environmental markets, batteries – basically the future of energy which is not oil! Male, 56
What about ESG versus performance?
To be honest, I don’t think you invest in ESG for the money, I think it’s something that feel you should do – I don’t want to waste my money, but I want to make sure that my money goes somewhere that is valuable, that’s actually doing somebody some good. Female, 68
I had the perception that I would be sacrificing potential returns for feeling like I was doing something beneficial. Female, 39
For me personally it’s more down to performance than any particular ESG approach but I’d expect – maybe naively – that if I invested in anything ESG, there would be an overall social impact that’s positive. Male, 26
What are your concerns and knowledge gaps?
What are the rules? People say ‘Oh we talked to company X to make sure that our specifications were followed’, but I’m not very sure what those specifications were…and what did they actually discuss? Have they actually had companies change? Female, 68
I’m not sure I know enough of what I don’t know! It is a massively complicated area and there are huge gaps. I think it’s very hard to say for example ‘an ESG score of 19 out of 20 is good’ because its impossible to judge on that sort of basis. Male, 56
Green investing: Savers explained their attitudes, from dismissive to eager
What sustainable investments do you hold?
My specific goal is not to harm the planet any further. With this in mind, I invest in US tech companies that exclusively avoid the heavy industry, the polluting, the chemical and mining behemoths of the early twentieth century growth model. Male, 66
I have invested in Fundsmith which I’d like to consider as relatively sustainable as they include a ESG section in their annual reviews (also they have reduced their position in tobacco industry. Male, 37
I currently invest in global funds, regional and UK funds and trusts with reputable companies who are focused on making their companies more ESG compliant. They are not necessarily advertised as ESG funds but part of my selection process is to make sure they do not hold companies that are actively damaging the climate. Male, 65
I select sustainable investments for financial rather than ESG reasons. As an example, nuclear power and wind power are both financially productive and sustainable. Male, 65
Looking ahead: Experts say most fossil fuel assets will need to stay in the ground to avert a clinate disaster
What are your expectations for sustainable investments?
I think it sends a clear message that this is the way forward and I think funds investing in this area will do well. Male, 64
It is a hot sector. Male, 57
With the increased interest in ESG investments, this sector’s performance has been doing very well. Female, 47
Social housing is something that I’ve lived and experienced, it’s an area that’s close to home. Housing is a tangible issue in society which we see on a daily basis, whilst climate change is all around us. Male, 39
I have started to look into it a little bit more now and I now know that if I’m making any changes or switching things about, this would be the first place I would look. Female, 59
I’m retired, I just want reasonably secure investments that give me some income and the opportunity to get a little bit more than you would from a building society. Male, 66