Funds investing with environmental, social and governance (ESG) concerns in mind have been around for decades. However, it is only in the past few years that retail advisers have begun to come around to products with a socially responsible objective. This is, in part, due to growing awareness of ESG issues amid high profile cases such as the Volkswagen emissions scandal.
Jonothan McColgan, director and chartered financial planner at Combined Financial Strategies, is one intermediary who has observed more interest from clients in this area.
“I think there is more investment choice in this arena, and as advisers have moved to fees after the RDR [Retail Distribution Review], they are asking much more personal questions and trying to understand how to add value to clients far more,” Mr McColgan explains.
Research conducted by sustainable and ethical bank Triodos surveying 2,005 adults, 1,404 of which had a savings product, found 63 per cent of respondents want their savings to have a positive impact on organisations and sectors that match their values. In addition, half of the respondents said they would switch providers to make a positive difference with their savings. Table 1 (on page 41) provides more information on respondents’ preferences.
Gradual evolution
Socially responsible investing (SRI), as it is now more commonly called, started life in the institutional investing space, and has taken some time to filter down to the retail industry.
Amanda Tovey, head of direct equity at Whitechurch Securities, explains: “Traditionally, ethical restrictions have usually applied when working with charities or trusts, or portfolios managed for religious establishments, and have been based on excluding areas that are deemed to be negative.”
The process of ‘negative screening’ typically saw fund managers excluding certain stocks and sectors from their portfolios, such as arms manufacturers, tobacco companies and gambling firms.
Ms Tovey notes: “This exclusion has in the past led to some periods of underperformance from ethical funds when areas such as tobacco or mining outperformed.
“They may also have a bias to smaller companies, which again can lead to a performance differential when large-cap stocks are outperforming.”
Data that seemed to indicate investing to salve your conscience meant having to accept lower returns held back ethical and other similar funds from gaining more significant levels of inflows. So too did the concept of negative screening, according to some fund selectors.
