An acquaintance asked for my advice on starting their own personal pension plan a few weeks ago.
A reasonably straightforward request you might think.
However, the request had a caveat, for they wanted to invest in ethically managed companies and to avoid investment in the fossil fuel industry.
Their request was no longer so straightforward.
It is, of course, perfectly understandable why a young professional, with a 30 or 40-year career ahead of them, might want to avoid investing in industries or businesses that are likely to contract heavily in the coming decades, and quite possibly become extinct – whether that is the result of pressures brought to bear by the movement around climate change, or unsustainable business practices so often associated with poor corporate governance.
Investing in an ethical, sustainable and responsible manner is appealing not only in a moral sense, but conceptually, as a long-term investment philosophy.
But the purpose of investing in this way is not simply symbolic.
Now, the responsible investor has greater choice than ever before. But that hasn’t made choosing an ethical fund or a fund investing in accordance with ESG principles any easier.It is the pooling of an individual’s pension savings pots which represents a major cornerstone of shareholder equity in the world’s largest and most influential companies – so if every individual investor were to align their investments with sustainable and ethical goals, this would have a far-reaching and direct impact on company management and industry practices.
The asset management industry acts as the middleman between capital and businesses on behalf of such investors and the strategies available to investors have a crucial role to play in tackling global environmental and ethical issues.
However, what may seem to many a modern-day concept and phenomenon has been perfectly well understood for centuries – the earliest and most active practitioners in this space being religious institutions. This is the very reason so many of the investment funds available to the advisory community, badged as ‘ethical’, were historically managed in accordance with faith-based ideals.
Indeed, it was religious institutions from all around the world that provided the seed capital for these funds.
Run along similar lines to the investment fund mainstream, these funds apply additional screens to exclude companies engaged in, for example, human rights abuses and the manufacture of weapons.
Once these funds became available to smaller investors, individuals could plan for their future while avoiding any investments in companies deemed unethical.
Today, there is a greater focus on ‘responsible investing' than ever before, with the demand for funds investing in accordance with strong environmental, social and governance (ESG) principles, growing exponentially in recent years.
The asset management industry has responded accordingly, with a plethora of active and passively managed investment funds claiming to invest in a responsible manner – investing in themes such as low carbon and social responsibility – now available, with new entrants to this burgeoning market in evidence by the day.
Now, the responsible investor has greater choice than ever before. But that hasn’t made choosing an ethical fund or a fund investing in accordance with ESG principles any easier, as industry standards and guidelines to determine what a responsible or ESG-focused portfolio should constitute are still evolving.
Therefore, finding specialist asset managers with genuine ESG expertise may be challenging for most asset owners and their advisers.
The reason may well lie in the fact that ‘ethical’, ‘sustainable’, and ‘responsible’ are broad terms, open to interpretation – and individuals and institutions alike will have differing criteria as to what they deem to be acceptable corporate behaviour.
Furthermore, there is no single globally-recognised ‘Green Standard’, as such, to define an individual fund marketed as environmentally focused, or an asset manager laying claim to incorporating strong corporate governance and social responsibility factors into their investment portfolios.
Without such a standard, an asset management firm may label their funds as they please, making no great effort to incorporate ESG practices into their investment process.
In Europe, Eurosif administers the Eurosif SRI Transparency Code. This is recognised as an excellent standard throughout Europe but has little if any traction globally.
As the demand for ESG investing has evolved, so too have investment processes and reporting responded in kind.
Therefore, distinguishing the genuine market leaders from the rest ought to become less onerous over time.
However, if investors are to rest easy, secure in the knowledge that the investments they commit to are genuinely sustainable, more definitive industry standards – be they ethically or environmentally focused – are vitally important.
James Fitzsimons is performance and market risk analyst at KBI Global Investors
