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Q3 2020 hedge fund letters, conferences and more
Record flows to ESG funds means that advisors will have access to better tools to analyze product effectiveness and will be able to construct customized solutions for their clients.
ESG investing is the hottest trend in asset management. Despite YTD fund outflows of $167 billion for all funds and ETFs, ESG-related funds saw record-setting inflows of almost $21 billion (through June 30), nearly matching their total 2019 fund flows of $21.4 billion.1 In 2019 alone, total ESG fund flows were four-times higher than the previous calendar year record.2
Investors’ embrace of ESG investing is also getting the attention of companies and regulators. In August 2019, the Business Roundtable announced a new, expanded “Statement on the Purpose of a Corporation,” committing its companies to benefitting all stakeholders and not just shareholders. It was signed by 181 CEOs, many representing some of the largest companies in the world. Whether this commitment is little more than mere virtue-signaling or a genuine commitment remains to be seen. But regardless of motivation, it’s clear that companies are paying attention to the demands of their investor base.
The parabolic rise in ESG investing has met regulatory resistance from the Trump Administration by way of the US Department of Labor (DOL). In June, the DOL proposed a new rule stating plan fiduciaries may not invest in ESG vehicles if the strategy subordinates returns or increases risk for the purpose of “non-financial objectives.” The proposed rule, combined with recent enforcement activity, suggests there’s skepticism and hostility inside the administration and DOL regarding ERISA plan investments in ESG funds. Notably, there were nearly 1,500 comments provided to the DOL during its uncharacteristically short 30-day comment period. Comments on the proposed rule – which came from a wide variety of asset managers, pension funds, investor groups, and others – were overwhelmingly negative and opposed to the rule.
What’s next for ESG?
With such powerful momentum fueling the growth of ESG investing, there are several developments that advisors and investors should consider. Among those are the following:
ESG investing will go mainstream over the next few years. It will no longer be a niche investment strategy. There’s no ignoring the market; billions of dollars of new AUM flowing into ESG solutions will continue to influence firms’ capital-deployment considerations and put pressure on boards to bend to the demands of investors. This trend will only accelerate as more women and millennials join – and eventually overtake – the ranks of investors. Increased market demand will result in more product choices and lower fees. Further, pressure is growing on fund complexes to improve their ESG practices across their entire product line, not just ESG-specific products. Consider BlackRock, the world’s largest asset manager. In Larry Fink’s 2020 letter to CEOs, he put sustainability at the center of BlackRock’s approach to investing. The DOL will cave to pressure from investors and asset managers. Pay attention to not only market demand for ESG solutions, but also to how that demand is pressuring their supply chains and regulatory bodies.
Read the full article here by Donald Calcagni, Advisor Perspectives
