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AJ Bell’s Khalaf: Endgame will see majority of funds incorporating ethical framework into investment process – #WorldEarthDay

Laith Khalaf, Head of Investment Analysis, AJ Bell

In celebration of World Earth Day, Laith Khalaf, Head of Investment Analysis at AJ Bell, provides an outlook for the ESG space.

The performance tide has turned against ESG funds of late, as growth stocks have floundered, and oil and gas companies have profited from rising energy prices. That won’t stop money flowing into responsible investments though. There is genuine consumer demand for these products, and the investment industry has sunk a lot of marketing dollars into launching new funds and rebranding existing ones which now carry the ESG tag. On top of which, longer term performance of ESG funds compares favourably to more traditional offerings, especially in the global fund sector.

We’re still in the foothills of ESG investing, and consequently the infrastructure to support investors is still being somewhat hastily erected. The FCA will be consulting on introducing a green labelling regime in the next couple of months, which should add some much needed clarity to what investors can expect the extensive ESG vocabulary to mean in practice. Greater disclosure requirements could well drive further flows into responsible investment funds. Data compiled by Morningstar shows that 42% of European fund assets now sit in ESG funds, even though the EU’s regulatory classification scheme was only introduced in March 2021 (what are known as SFDR Article 8 and 9 funds).

The widescale adoption of regulated ESG classifications in Europe suggests that the endgame is likely to see the majority of funds incorporating some kind of ethical framework into their investment process, especially those offered by large investment houses. Rules governing how advisers integrate their clients’ ESG preferences are also heading down the track, which will encourage asset managers to add a responsible investment lens to even more funds.

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