Institutional Asset Manager Newsletter 6.10.23

UK trailing in ESG stakes

Not a great week for ESG advocates as a report from the Institute for Public Policy Research (IPPR) reveals "how badly the UK is trailing in harnessing the economic advantages from the shift to net zero, primarily due to the lack of a green industrial strategy".
The think tank finds "a stark discrepancy" between the UK and its European counterparts when it comes to the green goods and services sector's contribution to the GDP—standing at a mere 3.9 per cent in the UK as opposed to the EU's 5.8 per cent.
Josh Emden, Senior Research Fellow at IPPR, says: "The roadmap to net zero is not just a climate necessity but an economic opportunity waiting to be tapped. With a green industrial strategy and robust public investment, the UK can not only catch up but lead the green economic frontier."
But with UK Prime Minister Rishi Sunak rolling back the nation’s net zero ambitions the likelihood of the country keeping pace with its European counterparts, never mind overtaking them, seems slim. Which leads us to news from Scientific Beta, an index provider and consultancy linked to the Edhec-Risk Climate Impact Institute, which finds sustainable ETFs have failed to beat the market for the past decade.
In a report entitled "Sustainability Alpha in the Real World: Evidence from Exchange-Traded Funds" Felix Goltz, Research Director at Scientific Beta, debunks the outperformance of ESG funds in 2020 describing the year as a "statistical outlier" and claims that that excess returns were offset by corresponding periods of underperformance.
Ultimately, ESG investors received returns of -0.2 per cent compared with the market index and -0.7 per cent compared with a benchmark with matching industry exposure, leaving Goltz to recommend that investors "consider such ‘real-world’ results and be aware of the limitations of analysis that selects particular funds or creates stylised strategies that may not reflect the real world of sustainable investing".
While the UK might be losing brownie points from investors with an environmental focus, it does at least find itself in the top 10 most financially inclusive markets in the world.
Analysis from Principal Financial Group and the Centre for Economics and Business Research of 42 markets worldwide saw the UK buck the trend for Europe’s largest economies by manging to improve its ranking and climb seven places up the charts.
The research analyses the support provided by employers and the government, and found that the country’s financial system was ‘an enabler of SME growth and success’ (up six places from 37th) and ‘an enabler of general business confidence’ (up eight places from 34th).
However, before the government congratulates itself too much, Seema Shah, Chief Global Strategist at Principal Asset Management, notes: "The actions of the UK’s financial system to protect the financial well-being of the population was, in large part, a direct response to a self-inflicted wound from the government’s ‘mini budget’. This is more a case of fixing a problem of its own creation rather than meaningful progress in financial inclusion."
Shah concludes: "We remain very cautious on the UK’s economic outlook and in Q3 2023 we adjusted our portfolios to reduce UK exposure."
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Voting closes on 20th October.
Gill Wadsworth, Editor
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