Investments  

How to make the right choice

This article is part of
Guide to ethical investing

How to make the right choice

As has been noted in other sections of this guide, consumer demand for sustainable funds has been a prime driver of growth.

But as has also been flagged, clients will likely have different ethical requirements, and so there is no such thing as a one-size-fits all approach for managers when designing and distributing a fund.

This means that advisers need to take a through look underneath the bonnet of any prospective fund.

Terminology

“There’s a problem around the terminology used in this space and descriptors such as ethical, sustainable, responsible, and impact are often used interchangeably.

This is wrong as there are clear differences between the approaches; though much overlap too, hence the challenge,” says John David, head of Rathbone Greenbank Investments.

“Advisers need to ensure they have a good grasp of the range of definitions so that they can fully assess the products or services they are considering for their clients.

“The range of available options is growing but is still limited relative to ‘traditional’ investment.

“It is certainly possible to create a well-diversified portfolio for the majority of clients, but if they have very specific interests or concerns a bespoke portfolio management approach may be more suitable than one comprising funds only.”

He goes further, explaining that the term ‘ethical’ can mean different things to different people, making it essential that funds which style themselves as ‘ethical’, ‘socially responsible’, ‘sustainable’, and ‘impact’ are completely transparent about what they are offering.

Mr David also lists a number of factors intermediaries should consider when selecting the right investment manager and/or fund. These include:

  • The experience of the firm or team.
  • Whether the manager supplements data from external providers.
  • Can individual criteria be accommodated?
  • Does the manager engage with investee companies

Investor profile

In terms of client types, it has often been assumed that millennials and their younger counterparts are the most likely to seek investments with an ethical approach.

But Clive Selman, head of UK distribution at Hermes Investment Management, explains this is not necessarily the case.

“We have seen a growing demand from clients looking for products that offer long-term, risk-adjusted outperformance, while also delivering societal and environmental returns.

“It is commonly thought that this interest is predominantly from a millennial investor base, but we are actually seeing a much broader appeal across a range of clients in the advisory and wealth space.”

But although interest in the sector seems to be on a sharp upwards trajectory, a couple of years ago the sentiment - with advisers at least - was less encouraging.

An Advantage poll conducted by FTAdviser in October 2017, found that 45 per cent of advisers said ethical funds and investments were popular among less than 20 per cent of their clients, while 33 per cent admitted to never even discussing ethical investments with their customers.