Throughout history, as asset classes emerge, they evolve as providers refine and expand their offerings.
An example of this would be, UK equity funds evolving into UK equity income, or UK small cap equity, and then further into something else as different investment styles take hold, with some managers deploying the value style of investing and others the growth style.
The strong performance of ESG portfolios since the Covid pandemic first struck in March 2020 has helped the asset class to evolve, while the regulatory changes mentioned in the third feature of this guide may mean that a new wave of clients will enter the market, leading to the creation of new ESG products.
Nicolo Bragazza, investment analyst in the portfolio management team at Morningstar, says: “Unless ESG investing is interpreted in the narrowest sense of 'impact investing', where impact is more important than profit maximisation, the application of ESG integration should not change the way in which we look at markets through the lens of value/growth or income.
"Globally, the number of companies meeting strict ESG criteria is broad enough to ensure that typical investment consideration could and should be applied. Moreover, this universe is constantly evolving because more companies have started to pay more attention to ESG issues and fund houses are offering new products to expand the ability of investors to build their preferred asset allocations."
Sophie Lawrence, senior ethical, social and impact researcher at Rathbone Greenbank investment, says generally, ESG portfolios are more likely to have a growth bias than a value bias.
"Technologies, products and solutions to solve environmental problems see accelerating demand supported by policy initiatives and regulation," she adds.
"This brings growth and increasingly, predictability too, improves momentum scores. Good governance and social scores tend to suggest a risk averse management style, also indicating quality. Not all ESG portfolios exclude fossil fuels and industrial minerals but many do. And it is common to find a lower exposure to basic materials or industries that are economy sensitive and more cyclical, a feature of a value approach.”
Mr Bragazza adds: “After these considerations, it is extremely important to point out that traditional investment rules apply to ESG investing as well. Value investing: the strategy of buying companies at a price meaningfully lower than their fair value, could be a good way to achieve superior risk adjusted returns and ESG considerations could also be of invaluable help in identifying great companies whose management and practises justify higher value not yet recognised by the market.
"As for income strategies, currently there is not a large number of ESG Income funds available to investors, but this is more due to the recent ascent of ESG than with structural limitations of these strategies in accessing companies able to provide sustainable sources of income.”
