The Week: The future of fund management

ESG may be the saviour of active management, but it’s place in the retail funds industry is still in flux.


  • Getting ESG right is critical to the long-term health of active management.
  • Over two-thirds of advisers said they had been asked by clients about responsible investing in the last six months
  • More work will need to be done on client requirements, which may be very different to institutional investor priorities

It has been a tough time for active investment managers. The Woodford debacle has dented the reputation of the industry, with even the strongest and most ethical fund management groups guilty by association. Flows had already been sliding in the face of the seemingly unstoppable march of passive, whose performance has been flattered by momentum-driven markets.

In the Square Mile ‘Future of Fund Management’ conference it was clear that the answer for many groups is to double-down on sustainability. Integrating environmental, social and governance considerations into their investment agenda is not only the right thing to do to restore the precarious reputation of the industry, it is something that passive can never match. In this way, getting ESG right is critical to the long-term health of active management.

Fund groups already need sound ESG credentials to have any hope of winning mandates in the institutional area. The regulators have been clear on fund managers’ responsibilities and that ‘fiduciary duty’ necessitates taking these factors into account.

The way ESG investing will develop in the retail arena is less clear. It is certainly a pressing concern: among the adviser audience at the Square Mile conference, 69% said they had been asked by clients about responsible investing in the last six months. However, there are a myriad of options and the right approach for most clients is still a work in progress.

As this evolves, advisers need to ensure that they’re with a manager who takes ESG seriously. Plenty of fund groups have an analyst stuck in a back room somewhere, but the most sophisticated have fully integrated ESG into their investment processes. It is worth asking whether a fund manager can ignore ESG considerations, or whether they are incentivised on them. Are ESG analysts involved in company meetings?

In the meantime, more work will need to be done on client requirements, which may be very different to institutional investor priorities. Do they want vegan funds? Do they care about excluding tobacco, oil, alcohol? New rules under MiFID will mean advisers have to ask investors for their ESG preferences as part of suitability requirements and this is likely to feed into product development.

Ultimately, the technology may allow fully bespoked portfolios, where investors can pick their investment criteria. This would get over one of the biggest problems for this type of investment – that one man’s ‘sin’ is another’s pleasure. Ultimately, however, it will pave the way for a very different investment management industry and one in which active management should thrive.