How responsible investment could kickstart the economy

24 August: Writing for the Financial Services Faculty, Jonathan Minter asks whether the investments industry could help the economy recover from the coronavirus recession.

In June, MP Bim Afolami published Unlocking Britain: Recovery and renewal after COVID-19, which called for the creation of a £15bn ‘recovery’ fund to be allocated by the British Business Bank to various fund managers to invest in small and medium-sized non-listed businesses. 

The proposal raises the question of whether fund managers may look to potentially use their investments to spur economic recovery, as opposed to purely focusing on maximising returns. 

While no doubt many managers would welcome the additional revenue stream of such a recovery fund, it would be important for there to be a separation between these funds and client funds. 

The idea of using client money to push an economic recovery as a moral imperative, instead of investing it most in line with the client’s investment objectives, is new territory for the investment industry. 

Demand

ESG investing involves including these non-financial factors into investment considerations. This has become a popular topic for investors and managers alike and the quickening speed of its adoption looks a key trend since the start of the pandemic.

Global fund network Calastone noted Environmental, Social, and Governance (ESG) funds had seen strong capital inflows since March and the start of the pandemic, as investor interest continued to grow in the sector. It described the popularity of ESG funds as ‘exploding’, noting the past four months to July had seen record amounts for investment inflows. 

July alone saw inflows of £362m for UK-based ESG-focussed funds. 

This came despite equity funds suffering outflows June and July - overall, Calastone noted funds experienced a £240m outflow in July. 

Industry response

Stephen English, Head of AIM Stocks/IHT Fund Manager at Blankstone Sington, sees using capital for progressive social change as a ‘moral maze to which there may be no map.’ One main consideration from the asset manager's point of view is that investors will have different risk appetites which need to be considered. 

English notes: “While virtuous, each and every client would have a different appetite to fund a recovery, presuming that a trade-off exists between having to take on much higher risk to capital to fund such endeavours.” 

Alex Imrie, Partner, Investment Management at Smith & Williamson, observes that companies that follow ESG principles have been more resilient during the pandemic, owing to their forward-looking nature and stronger governance.

However, the choice about where to invest and what good it does for wider society is down the client, not the industry.

Imrie says: “I wouldn't want to impose my moral view on clients’ money. It's incumbent on me to have that conversation with clients and discuss strategy that may well encompass ESG and understanding what their goals are.”

You can read a more detailed article about this on the Financial Services Faculty pages.