LONDON (Reuters) – A record number of ‘socially conscious’ mutual funds and exchange-traded funds were launched by asset managers last year, keen to tap growing demand from retail investors.
A total of 382 such funds were launched globally during 2018 to take the total to 3,160, industry tracker Morningstar said. Collectively, they manage $1.2 trillion in assets, double the $622 billion managed in 2009.
Total flows into the funds were $39 billion, down from the prior year’s $72 billion, in part as a result of weaker investor sentiment that saw global stock markets sell off on fears tighter central bank monetary policy could hit economic growth.
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“Over 2018, you really saw ESG adopted across the industry,” said Morningstar analyst Anastasia Georgiou, referring to the environmental, social and governance-related issues (ESG) that help determine what to include or exclude from the funds.
However, there is currently no clear-cut regulatory or industry standard for ‘sustainable’ investing, a gray area policymakers are concerned could mislead investors.
“Most of the industry seems to have adopted ESG, but how people are applying it is different. From an investors’ perspective they want to be able to compare these ESG measures on a like-for-like basis,” said Morningstar’s Georgiou.
A broader measure of investing “sustainably” used by the Global Sustainable Investment Alliance, which includes institutional money and funds not explicitly badged as ESG but which use some measure of ESG in their investment process, put total assets at $23 trillion at end-2016.
Calls from policymakers for better oversight of the sector have become louder as governments, particularly in Europe, look to help the financial industry better allocate capital in the global fight against climate change.
European Union rulemakers have proposed tightening the rules. “We see divergences and differences between difference types of products… some are clearly more ‘green’ than others,” a European Commission official said.
In France, the government has launched a certificate to help identify sustainable funds, while in Britain trade body the Investment Association has proposed a series of changes aimed at shoring up confidence in the sector.
As well as marketing some funds explicitly as socially responsible, most fund managers are also weaving the principles into their mainstream products on the basis that it can help avoid riskier investments.
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The move is being driven by major institutional investors such as pension funds, sovereign wealth funds and insurance companies, many of which want ESG risk assessed more fully.
A survey by New City Initiative, a fund-backed industry group, found 90.5 percent of its members incorporated ESG-related assessments into their investment process in some way.
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Reporting by Simon Jessop and Ritvik Carvalho; Editing by Hugh Lawson