ESG fund managers are bullish on financials again, having shunned the sector for the best part of a decade after the financial crisis.
The financials sector came under intense scrutiny in the wake of the global financial crisis in 2008, which led to thousands of job losses and plunging stockmarkets.
Since then, banks have been fined for their actions and regulation has been put in place globally to improve capital adequacy requirements and prevent banks from taking excess risk.
The changes have been a two-step process. Firstly, requiring banks to meet regulatory requirements, and then building their culture to show how they are having a positive impact, including job creation, staff training, building sustainability plans and issuing green bonds.
As a result of these improvements, ESG managers are now adding financials to their portfolios.
Jamie Jenkins, head of responsible global investing at BMO GAM, said financials are the second-largest weighting in his BMO GAM Responsible Global Equity fund at 19%, which he has been adding to recently. This compares to a zero weighting in 2016.
"We have been rebuilding exposure to the financial services sector. It took us a while to gain faith after the financial crisis. But in a market that is expensive, [these companies] offer attractive valuations."
Des Flood, manager of the Davy Ethical Equity fund, said financials "have come a long way since the financial crisis".
He said: "The regulator is crawling all over them and they have to hold more capital. Companies are also spending thousands on data security to prevent people getting hacked."
Like Jenkins, Flood has 18.6% allocated to financials, his second-largest weighting on the fund.
Alix Foulonneau, ESG analyst at UBS Asset Management, agreed banks have evolved since the financial crisis.
"They have been getting their house in order. We have had interesting conversations with management and they are keen to create responsible businesses. UK banks are still burdened by regulation, but we are seeing efforts at corporate responsibility."
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