What is sustainable investing, anyway?

This article is part of
Sustainable Investing - March 2014

To say sustainable investing is a broad term would probably be one of the biggest understatements in investment.

The parishioners in the ‘church’ of sustainability include ESG (that’s environmental, social and governance), SRI (socially-responsible investing) and the more nebulous ‘ethical’. These terms themselves are extremely broad.

The lack of a homogenous adjective could well be a barrier for this part of the fund industry, because while its desired outcomes are laudable, navigating and understanding the universe as an adviser is potentially quite difficult.

What’s in a name?

A straw poll consensus seems to suggest ESG is the best way of actually expressing what sustainable investing is.

‘Environmental’ covers such things as renewable energy or the impact a company has on the environment; ‘social’ covers how companies deal with issues such as fair pay for their employees; ‘governance’ includes the aims management has for a company.

Yann Gindre, head of networks and global outreach at the United Nations-supported Principals for Responsible Investment initiative, says one issue with sustainable investment is that many fund groups agree on what it is but adopt different names for it.

The PRI has 1,325 signatories globally including asset managers, and represents $45trn (£29.2trn) of assets under management.

Essentially though, Mr Gindre seems to agree ESG is probably the broadest way to think of sustainable investment.

“The term which covers the most areas is ESG because it covers various factors,” he explains. “ESG should be supplementary to financial analysis.”

He points out many private equity investors are well versed in assessing businesses on ESG grounds and will analyse the management and governance of a company, as well as consider social and environmental issues which could impact the business down the line.

Aviva Investors’ Ian Aylward, a multi-manager at the firm, says picking ‘sustainable’ funds is fairly intuitive as they are categorised by data providers.

But finding a fund firm which espouses ESG credentials throughout can be tough.

“Finding funds from a firm that believes in sustainable investments is less straightforward but characteristics that one should look for are signatory to the UNPRI, adherence to the Stewardship code and specific comments within due diligence questionnaires,” he says.

Mr Aylward also encourages engagement – suggesting investors need only ask fund groups how they deal with ESG issues to find out if they have a clear policy or not.

“My team uses a system from MSCI that awards ratings to stocks based on their ESG / sustainability characteristics,” he says.

“We monitor the funds / mandates we have with external managers to make sure we have negligible lowly rated stocks and we question the portfolio managers on any that they may hold in our regular meetings.”

Mr Gindre agrees the best way for advisers to be sure ESG issues are important to a fund group is to engage them on the topic.