The turmoil of this year has been reflected in markets and many investment strategies have faced severe performance issues. Equity markets have witnessed extreme volatility while stubbornly high inflation has made bonds unappealing. Investors have responded with their feet, with outflows from funds mounting month-on-month according to figures from the Investment Association.
One exception to this trend has been responsible investment, which has had net positive inflows in all but one month of the year.
This trend offers some level of reassurance to counter suggestions that responsible investment is a fad driven by the recent strong returns of many strategies that adopt this approach to investment. Although a six-month time frame is far too short a period to judge the credibility of any fund in performance terms, it is completely irrelevant when measuring the success of positive change in respect of environmental or societal challenges that responsible investment funds can offer.
The fact investors have continued to allocate their savings to investment strategies that are aligned with their desire to improve society, halt climate change or deliver greater biodiversity is significant. It would suggest they understand the need for a longer-term perspective – change over time, rather than change at a point of time. While shorter-term financial performance is a consideration, it is a lesser concern than their desire to leave the planet and society in better shape for future generations.
What is significant for the asset management industry is the opportunity to use this continued demand for responsible investments to forge a working relationship with consumers. And fund groups have a compelling chance to boost consumer confidence in their ability to influence businesses to do good, avoid harm and to lead change through market capital flows.
Trust, however, cannot be taken for granted. Scepticism remains in some quarters that the asset management industry has been successful in assuming a green veneer through convincing marketing. This practice cannot be viable over the long term. Trust must be built on measurable evidence and transparency, wherein lies the challenge; currently, there are no standard reporting metrics to help investors interrogate the funds they are considering or compare them against others within their peer group. Nor are there clear categorisations defining the parameters and objectives of the various forms of intentionality.
The coming year, especially with the arrival of the Sustainability Disclosure Requirements in the UK, should see some progress in addressing this issue. Also, the increased disclosures that funds will be required to present to demonstrate the societal or environmental change they are affecting must be both accessible to the lay investor and offer meaningful evidence to support the intentionality of the benefits they bring.
There has been a greater reliance on MSCI ESG metrics over the last year, as well as more widespread use of the United Nations’ Sustainable Development Goals as a means of providing a yardstick for the good a fund purports to engender.
But how that good manifests itself is altogether more challenging to prove. For instance, a fund manager might press for greater representation of diversity at a board level, but it is also beholden for them to explain how that one element enhances diversity across its operations and any positive societal impact that brings. This is altogether more difficult to quantify.
The ongoing popularity of responsible investment at a time when investors are withdrawing monies from markets in aggregate is a heartening indication of a developing relationship between consumers and the asset management industry. It suggests that there is a broader acceptance that an individual can align their investment objectives with their desire to be a force for good by favouring fund groups with the expertise to effect positive change though the companies in which they invest.
The longevity of that relationship, however, will be determined by the ability of fund groups to demonstrate the extent to which society, the environment, their investors and the investment industry itself all benefit from responsible investment.