Where will ESG product demand be in 2022?

Focus on decarbonisation and sustainable food systems

The rise in demand for responsibly invested products is set to continue into 2022, with more investors focused on environment and decarbonisation funds, as well as food and agriculture.

However, investors will also be more discerning and seek funds that can demonstrate active engagement with their portfolio holdings and offer clear and transparent disclosures.

Last year, numerous reports predicted ongoing growth in responsibly invested funds – notably Broadridge Financial Services, a fintech company headquartered in New York, used its market intelligence platform to analyse the net flows of ESG mutual funds, ETFs, institutional mandates and private funds to predict that assets under management in dedicated ESG strategies is set to reach $30trn by the end of this decade.

Looking at the year ahead, commentators told ESG Clarity that investors seeking to integrate their personal views on the environment and society into their wider portfolios – as opposed to opting to include one or two ESG-focused funds – and conversations feature more questions around disclosure and transparency.

“We see the most change in 2022 coming from better informed clients feeling more confident that they can align their personal values with their investments,” Declan McAndrew, head of investment research at financial advisory network Foster Denovo said. “Rather than focusing on a single company, clients are looking at the whole supply chain as they are striving for transparency and authenticity in ESG and sustainable investing.”

He did however add that the pace of flows may not continue at an accelerated speed in 2022 after two years of strong net flows.

See also: – Sustainable funds see highest flows across categories

Denovo said: “Fund flows into ESG and sustainable investments will likely increase further in 2022. This will probably be at a more measured rate with a focus on the longer-term changes required, rather than the recent short-term attention on the relative outperformance of ESG investments.”

Miranda Seath (pictured left), head of market insight at the UK’s Investment Association, also noted flows continued apace in 2021 despite the margin of outperformance by ESG funds decreasing from the year before.

Responsible investment fund flows for the year-to-December 2021 were £13.bn, already surpassing 2020’s £11.bn, and were on course to finish 2021 at circa £15bn. This is in spite of more favourable performance conditions for S&RI funds in 2020. We expect consistent demand for S&RI funds to continue in 2022 – on current evidence, inflows are less affected by the market cycle.”

She also noted the record monthly inflow of £2.2bn into SR&I funds in September ahead of COP26 in November and that largely this was aimed at environmental funds.

“Environmental issues and the de-carbonisation agenda were front and centre in the news and this is filtering through to investor fund choices,” she said. “We expect to see funds that have environmental objectives continue to gather flows and in particular, funds that are helping to drive the transition to becoming carbon neutral.

“Investment managers can help so-called brown companies make the transition to green through stewardship and active engagement. We are likely to see more funds launch with this objective as our industry and investors are asked to help meet 2050’s net zero goal.”

Engagement, disclosure and transparency were again raised as key focuses for fund investors during ESG Clarity’s interviews.

Sarah Peasey, director of European ESG investing at Neuberger Berman, said the “more active, engaged and forward-looking perspective of genuinely sustainable investing is critical”, particularly in areas such as emerging markets.

“We also see an increasing role for engagement,” she said. “While country-level progress can be slow and modest, it can contribute to better performance in key areas such as carbon emissions, global tax transparency and corruption, money-laundering and terrorism financing.”

Increased education around ETFs

ESG ETFs also saw record growth last year despite the argument active managers can evaluate companies faster and have better influence of boards.

Research and consultancy firm ETFGI, reported in November 2021 record year-to-date net inflows ESG ETFs and ETPs listed globally of $130bn, which was 49% higher than the record full year 2020 net inflows. Total assets invested in ESG ETFs and ETPs at the time stood at $361bn.

This growth is also predicted to continue particularly as ETFs can capture certain parts of the market and offer thematic products. Dr Christopher Mellor (pictured right), head of equity and commodity product management at Invesco, explained: “We expect to see strong demand for ESG ETFs in 2022, perhaps even more than the past year when half of all equity ETF flows were into funds that have ESG objectives. Investors will continue increasing their use of ESG ETFs as core portfolio holdings and, possibly more notably, fine-tune those portfolios especially in terms of the environmental impact or other measurable targets.

“One of the greatest opportunities, in our opinion, is being able to capture such powerful trends as the transition to cleaner energy. The challenge for investors is determining which themes are backed by sound investment rationale rather than just hype, and how they fit into a diversified portfolio.”

He did however highlight investors need to improve their understanding of the relationship between returns and improvements in ESG: “The more that is excluded or materially changed from an index, the more the returns are likely to deviate. Investors may need to consider what balance is most suitable for them.”

Responding to the active manager argument around transparency and board influence, Mellor also commented: “We expect to see more ETFs launched that meet specific measurable targets, especially around key sustainability metrics. We would also hope to see increased transparency from ETF issuers on how they engage with companies on ESG issues. We believe engagement is one of the most powerful ways investors can drive change, and this is just as relevant for passive ETFs as for active funds.”

Focus on food

Sustainable food production and agricultural farming are key themes investors are paying attention to this year, with both areas facing many challenges.

“The world is faced with two trends happening simultaneously; global resources are dwindling and the population growing,” said Patrick Thomas (pictured left), head of ESG portfolio management for Canaccord Genuity Wealth Management (CGWM).

“Looking towards the future, we have a huge challenge and potentially a significant opportunity to invest in a sustainable food system which can provide sustainable, nutritious and healthy food to a growing, urbanising population more efficiently, and reduce the environmental damage to the planet which is currently intensifying.”

He added around 20% of the global population suffer from a ‘poor’ diet according to the Food and Agriculture Organisation – and “vast investment is needed” to provide a growing global population with nutritionally high-quality food and deliver this in an efficient and sustainable way.

As a result, the CGWM team are looking at companies providing innovative solutions to increase output, while decreasing environmental impact and waste but is also eyeing productivity improvements in farming.

“Investing in companies that adopt best-practice farming techniques will lead to increased efficiency, less waste and lower costs due to economies of scale,” Thomas said. “We will also see increased efficiency in food transportation and processing – with food waste occurring during harvest, processing, transport and storage, there are many opportunities for companies to increase efficiency. Innovations include anti-microbial packaging that helps to prevent damage during transport and maintain food safety, while innovative sensors on food packaging can help avoid confusion about ‘use-by dates’, reducing the vast amount of food thrown away. And maximizing the nutritional content of the food we eat is another area – nutrient loss can be averted through better efficiency in the supply chain and through fortifying foods with nutrients, improving awareness through better labels and even modernising food safety regulations.”

CGWM is not alone – a number of UK asset managers wrote an open letter to the UK government in December calling for action on sustainable food systems within its National Food Strategy.

Groups including Rathbone Greenbank Investments, Legal and General Investment Management, Aviva Investors and EOS at Federated Hermes, representing over £3.8trn in assets under management, alongside the Guy’s & St Thomas’ Foundation urged the government to “demonstrate clear leadership and ambition” in promoting a healthier and more sustainable food system in the UK by introducing new legislation on mandatory reporting of sales-weighted metrics due to a notable lack of consistency in how metrics are being reported.  For example, analysis from the Food Foundation shows that while five out of 11 UK supermarkets have now set targets for reporting on healthier food sales targets, only two report on the percentage of their protein sales that come from animal versus plant-based sources: a shift that is urgently needed for the UK to meet net-zero targets.

Sophie Lawrence, senior ethical, sustainable and impact researcher at Rathbone Greenbank Investments, said: “This investor group recognises the multitude of risks and opportunities facing the food industry linked to issues such as nutrition and food waste. 

“A key challenge for investors to date has been the lack of consistent, high quality and meaningful information on the nutrition and environmental performance of companies within the food sector. While there are examples of good practice in individual disclosures, a lack of common metrics means investors are often limited in our ability to direct capital toward the companies which are taking a proactive and leading approach to sustainability issues. We therefore welcome the recommendation of clear and consistent mandatory reporting requirements for companies in the food sector.”

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...