The UK has one of the longest standing histories in respect to responsible and sustainable investing, and the region has been a fruitful source of returns for ESG investors over the long term.
The past few years, however, have been difficult for responsible and sustainable investors in UK equities. A combination of negative Brexit sentiment and the coronavirus pandemic have weighed heavily on share prices and hampered investor confidence in the market. Although demand for ESG investing continues to grow more widely, the UK has been largely overlooked and under-allocated to, as other regions have outperformed.
Despite this, the UK has a unique opportunity to take a global leadership position as a market for ESG investors, driven by a number of sustained industry trends and a more supportive macro-economic picture for UK equities as we move through 2021.
A key development is the enormous shift in attitude towards ESG issues that we have seen over the past few years, putting the UK government and capital markets on a positive trajectory to embrace responsible and sustainable factors. For example, we now have previously unseen commitments from the UK government to achieving environmental targets.
The pandemic has accelerated this trend in a number of ways. First, it has brought social issues into much greater prominence, clearly highlighting the social inequities and injustice that exist within the current global financial and economic system.
Second, the wave of vast new fiscal stimulus packages to combat the pandemic slowdown in most major developed economies are noticeably targeting green technologies and infrastructure; this was apparent in the UK’s stimulus package which included plans to quadruple offshore wind power, boost hydrogen production, invest in carbon capture technologies and make London the capital of green finance.
Finally, we are seeing strong support from financial institutions and industry bodies to make positive change. For example, Andrew Bailey, the governor of The Bank of England, has spoken out on the important role that capital markets have to play in achieving the transition to a resilient, carbon-neutral economy.
This is leading us on an irreversible trend towards an increased responsible and sustainable opportunity set for UK equity investors. Combine this with the supportive macro-economic backdrop; low interest rates and low inflation driven by ongoing monetary and fiscal policy, and the hopes of the UK economy re-opening as the vaccine roll-out continues, and the result could be a compelling recovery story for ESG investors in UK equities, provided they are willing to look through the noise and short-term uncertainty.
ESG investors must focus on how the UK is positioned for longer-term future growth, combined with the fact that the region provides a rich seem of companies that are ESG leaders, across a diverse range of sectors such as healthcare, industrials, materials and technology; providing us as responsible and sustainable investors with plenty of stock-picking opportunity.
Ketan Patel is manager of the EdenTree Responsible & Sustainable UK Equity Fund and an ESG Clarity editorial panellist.
