The rise and rise of ESG in digital wealth

This is an excerpt from AltFi’s Digital Wealth State of the Market Report 2021, which is available for free here.

Eco-investing is flourishing amid increased demand from investors of different stripes. Some want to make ESG (environmental, social governance) investments from a moral standpoint.

In contrast, others view those firms performing well on ESG issues—like climate change and boardroom diversity—as astute long term financial investments. According to one expert, the political and social momentum behind the green agenda could one day nullify the term ESG altogether.

Richard Flax, Chief Investment Officer of Moneyfarm, said: “You could consider a scenario potentially where actually everything becomes SRI (socially responsible investing). The standard of expectations for all companies rises. Maybe the best outcome is the definition of SRI goes away, and there is no distinction between SRI and non-SRI. There is simply the standards that companies are held to.”

While this goal may be for the future, the humungous number of ESG assets held in funds shows the industry’s rude health.

Eco Investing In Rude Health

According to Deutsche Boerse, across Europe, monthly investments in ESG focused ETFs more than tripled to nearly €3bn year-on-year in the first half of the year. And Bloomberg has predicted that global ESG assets under management (AUM) are on schedule to top $53 trillion by 2025, making up more than a third of the $140.5 trillion in projected total AUM.

In the UK, like in other markets, fintechs have been in the thick of the action, launching ESG portfolios and anticipating that such funds will be pivotal to their businesses in the future.

UK-based digital wealth firm Moneyfarm launched its socially responsible portfolios only in the past few weeks but denies it is late to the party, with Flax saying that sustainable investing “will continue for a long time to come”.

Supporting the launch of its portfolios was data showing that between 2013 and 2021, an ESG portfolio would have earned five per cent more than its regular non-ESG portfolio.

Flax argues Moneyfarm’s responsible portfolios also have a crucial point of differentiation.

He says: “Sometimes you see people want an ESG label, but they don’t want to take a lot of tracking error relative to the standard benchmark. We have gone in a slightly different direction because we would say ‘we want to see a meaningful difference between the ESG portfolio and the standard portfolio’ because I think that is what our clients would expect.”

The returns on Moneyfarm’s ESG portfolios, which have attracted new and existing Moneyfarm consumers, have “been fine”, says Flax—although he adds that it’s too early to give meaningful analysis on the performance of the portfolios.

Rival Nutmeg, which JP Morgan Chase has recently acquired, launched its socially responsible portfolios in 2018 amid demand from clients.

According to Pacome Breton, Director Of Risk And Investment Risk at Nutmeg, the portfolios attracted £100m in funds in the first two months, then nearly £500m in the next 18 months.

The funds have around 35,000 clients, out of Nutmeg’s total client base of 150,000, says Breton.

On the demographic of investors and performance of the funds, he said investors tend to be a bit younger and more female.

Still, there is “not a massive divergence” in demography to Nutmeg’s other investors while the portfolios have “outperformed “ non-ESG products.

German fintech Raisin has included more than 30 ESG funds on its new hybrid-robo trading platform that lets investors pick and choose off-the-shelf ETFs. The ESG portfolio provides exposure to around 150 individual equities (compared to the 600 in its non-ESG fund).

It is broadly and globally diversified, taking into account environmental impact, working conditions and tax transparency.

Raisin’s chief investment officer Kim Felix Fomm, Raisin’s Chief Investment Officer, points to “a lot of research” showing investment based on ESG criteria outperforms traditional markets.

But Fomm says the industry is still young and that Raisin “would be very careful to tell people ‘you will make more money.’” He says that Raisin tells clients, “you don’t have to settle for lower returns only because you want to invest based on sustainability criteria.”

Fomm says the push behind ESG investing means it will become a more significant part of the Raisin business in the future. “We definitely see pressure from the regulator, [and] from politics on that topic,” he says.

“We see, especially from younger target groups, a lot of interest. Young investors basically demand to have some sort of ESG or sustainability option.”