Why is the LGPS still such a fan of ESG?

Enthusiasm for ESG investing peaked in the years after the pandemic, but many investors have been pulling their money out of these funds since (Sebastien Nogier/EPA-EFE/Shutterstock)

Retail investors have been pulling money out of ESG investments for several years as enthusiasm for the style turns negative. Is this reflected among asset owners?

Welcome to the second edition of AOX. Drop us a line on aox@ft.com if you have any questions or comments.

For the past few years it has been a tough environment for fund management companies selling environmental, social and governance-tilted products to retail investors.

For a brief few years during the Covid 19 pandemic, ESG was the place to be - according to data from the UK fund management trade body the Investment Association there was nearly $40bn (£30bn) of net sales in 2020 and 2021.

But since then it has been a more hostile environment: net sales flipped negative in 2023 and since then events have only taken a turn for the worse. So far this year £3.6bn has been pulled from ESG funds in the UK.

This got us thinking. Have UK asset owners also cooled on ESG?

The answer is that it depends very heavily on which sector you’re looking at.

Family offices are hardly touching the sector, with a net $966,000 going into ESG investments in 2025 so far, according to data from AOX’s sister title Mandatewire. Last year no money went in, on a net basis.

Charitable funds are more enthusiastic, as you might expect, but only up to a point: so far this year $20m has been invested. This is down from $83m last year. It’s going to have to be a busy Christmas if charities are to catch up.

So where is the real business taking place?

The answer to that question is pensions. And not just any pensions but the Local Government Pension Scheme in particular.

So far in 2025 LGPS funds have, according to Mandatewire data, put $11.8bn into ESG investments. By contrast, non-LGPS funds have withdrawn $9.5bn on a net basis.

For non-LGPS pensions, there is still a sizable amount of money flowing into ESG strategies (£26bn so far this year) but there is also a large amount of money flowing out ($37bn).

LGPS funds are putting a large amount of money in ($13bn), but so far this year only $1.3bn has been pulled out. So the direction of travel is largely in one direction, with a similar pattern seen last year.

Of course, one advantage the LGPS has compared to some asset owners is that it can think more long-term.

Drew Henley-Lock,a partner in LCP’s investment team, told AOX: “This means that long-term risks like climate change will weigh much more heavily in their thinking, and may well lead them to conclude that some activities that are profitable now will ultimately make it harder for them to meet their pension obligations in the future.”

He also pointed out that some LGPS investments may be labelled as “ESG” but would in reality be investments such as local affordable housing, which are obviously a long way from an ESG listed equity fund.

Tony English, head of LGPS investment at Mercer, also pointed out that many LGPS funds have set net zero targets, including interim targets for 2030.

“LGPS investors are typically more disciplined long-term investors, so these targets focus investor attention on a range of factors, including emissions intensity, climate alignment and climate solutions, which in turn has supported fund flows into a range of sustainable investments across both public and private markets,” he said.