It is no understatement to say that environmental, social and governance (ESG) has become one if not the biggest issue in the world of investment over the past few years.
There is rarely a week that passes without the launch of a new ESG fund or the announcement that an existing fund is being reshaped to further embed sustainable or social impact criteria.
The same report shows that investors have ranked combatting climate change as the second most urgent issue they want to see their fund managers to focus on, right after “fair pay for workers”.
It seems to indicate that there is effectively a growing demand for sustainable investment in the UK, but is the local market fit for this purpose?
“I think many people have a perception that the UK is not a good hunting ground for sustainability companies,” says Stewart Investors Sustainable Funds Group portfolio manager Rob Harley.
The Stewart Investors Sustainable Funds Group started its investment journey in the Asia-Pacific region, before expanding to other emerging markets and finally adopting a global focus.
After exploring investment opportunities around the world, the team observed that some of the best sustainability firms are in Europe.
Is ESG possible in emerging markets?
Yet, when we think of sustainability in Europe, we might think of the Netherlands, Germany or perhaps the Scandinavian countries first.
But Harley believes the UK is a great place to find high-quality sustainability firms that are as good as those in countries regarded as leaders.
UK Sustainable Investment and Finance Association (UKSIF) senior policy and communications manager Oscar Warwick Thompson even considers the UK a leader in ESG investment.
He says: “I think that while the UK could, and should, be doing better as a centre for ESG investment and always aspire to be a global leader, we are among those countries leading the way in many respects.
“This is in part due to the leadership shown by the UK government and FCA, and the success of the UK sustainable finance sector. The sector has played an important part, setting a good bar for active stewardship and innovating in terms of new sustainable investment products for clients and savers.
“For example, many UK investment managers now offer a wide range of responsible investment products, such as ESG exchange traded funds and climate-change funds that seek to mitigate the risks of climate-change and social impact funds.”
Warwick Thompson added that more and more UKSIF’s members, including HSBC Global Asset Management and Invesco, are launching new funds seeking to address biodiversity related risks and opportunities.
AXA Investment Managers portfolio manager Nigel Yates also stresses that UK firms are setting carbon emission reduction targets and seeking to get them independently verified.
He says: “What is pleasing in the UK is that companies really get it and they are challenging themselves to ensure they have responsible business practices.
“It helps that employees are demanding it. On many occasions when we talk to CEO’s they state that the best ideas are coming up through employee forums and company ‘green teams’ who are also engaged to make the necessary changes.
“It is also broad based and not always from the most obvious industries. [Furnishing retailer] Dunelm recently announced a head of climate change, a 50% carbon emission reduction and have set about offering more sustainable products in their range.
“When you combine all these businesses that are ‘in transition’ from an ESG point of view with companies that are leading the world in sustainability such as [chemicals company] Croda the UK is a great hunting ground for ESG investing.”
Yates observes the UK market provides a good selection of firms that are helping “hard to abate” sectors to reduce their carbon emissions, such as engineering firm Weir, manufacturer Rotork and software provider Aveva.
He adds: “We expect to see more punitive carbon pricing, energy taxation and other climate-related regulations to speed up the transition.
“The market is likely therefore to reward the companies with immediate and credible CO2 reduction strategies.
Yates believes that it will help consumers to better direct their consumption needs to more sustainable products and services.
The UK has also shown a strong commitment towards renewables and a transition to a low carbon economy, with Boris Johnson announcing ambitious targets for offshore windfarms and to make of the UK the “Saudi Arabia of wind”.
But Nomura Asset Management lead portfolio manager of the Global Sustainable Equity fund Alex Rowe warns that UK companies will not be the main beneficiaries.
“From a public equity investor perspective, the greatest beneficiaries of this from an economic perspective will not be primarily UK companies, which do not feature overly prominently within the offshore wind supply chain, while continental European companies dominate on the development side,” he says.
Rowe also underlines that the UK as well as Europe leg behind the US and China when it comes to innovation, especially in the tech area.
He says: “We do not have the same spirit of entrepreneurship and support of venture capital. It is no secret that equity investors in the UK have not experienced the same returns, especially when compared with the US and this has been in part as a result of falling somewhat behind with regards to innovation.
“We face huge problems as a global society today and we need new and innovative solutions to tackle these challenges.
“It is those companies that come up with the best solutions to tackling these challenges that will be the best sustainability investments.
“Therefore, core to being a great market for sustainability investors would be providing a world leading environment for innovation.”
He adds: “On the flip side there are many other sustainability challenges that come with a more accommodating environment for innovation with regards to employment rights and the protection of consumers but solving this issue and striking the right balance will be core to whether the UK can be a great market for sustainability investors over the long term.
“With regards to the balance that must be struck between stakeholders, certain regulated sectors will be absolutely vital to providing the investment in the infrastructure we need for a transition to a greener economy.
“It is very important therefore that there is an accommodative environment for them to invest and a sense that regulators will allow them to be properly remunerated, whilst also of course protecting customers.
“Regulators across both the UK and Europe have clearly not always gotten this balance right.”
The best way to push companies towards becoming ESG-compliant is tax breaks for those who do and tax penalties for those who don’t.