ESG investing has become increasingly complex but there are a few things advisers can look out for when advising on the assets.
John Ditchfield, head of responsible investment at Helm Godfrey and chairman of Impact Lens, said ethical investing is expected to become more popular in future years, not only as a ‘morally right’ decision but also as a smart investment choice.
Environmental, sustainable and governance (ESG) investing takes into account ESG factors alongside financial markers in the investment decision-making process and has become a more commonplace part of the global investment space in recent years.
But there are concerns not all investments are as ethical as they seem, as companies and fund houses take shortcuts to appear more sustainable than they really are in a phenomenon dubbed ‘greenwashing’.
There are also signs advisers are not responding well to ESG, as they are often blamed for the slow take up in the UK retail market, potentially due to the complexities the market carries.
Mr Ditchfield said it was important for advisers to understand which funds were genuine about their approach.
A particular issue is the lack of standardised reporting methods from either ESG funds or companies, so some firms are able to appear ESG compliant at the ‘headline’ level, without actually running in line with ESG principles.
Mr Ditchfield said: “Responsible investment has grown but, let’s face it, it’s also become much more complicated.
“There are a vast range of responsible investment products now on the market and poor data on a fund’s actual impact often leads to clients being matched with unsuitable funds.”
He said advisers needed to be wary of taking funds' labels or titles at face value and note the potentially substantial differences between funds purporting to be ESG.
Mr Ditchfield went as far as to say advisers could face misselling claims if a client who specifically asked for a certain type of investment was invested in a fund not suitable for their wishes.
Charlene Cranny, communications and campaigns director at the UK Sustainable Investment and Finance Association, said the onus was on the adviser and investor to do the research as there was no proper certification on ESG funds.
She said: "Advisers can look under the hood to see exactly which companies are in the fund by researching or asking the fund manager.
"If there are companies in there that look a bit dodgy, ask the fund manager how it is engaging with those companies to ensure they are improving on ESG — they might be in there so the fund manager can affect positive change as an owner."
Jason Hollands, director at Tilney, said the selection of ESG funds was “inherently more complex” than a conventional fund as an adviser needed to consider both the ESG screening process and how policies were developed.
He said: “In assessing the track record, it is vital to do so in the context of an appropriate benchmark given the mandate of the fund and as policies on ESG funds vary, it is vital to tailor fund selection to the needs of a client.”
Impact Lens, a new agency which aims to demystify the complexities of responsible investing, has tipped Montanaro Better World, Stewart Investors Asia Pacific Sustainability, and Rathbone Ethical Bond funds as three of the best picks for advisers with clients opting for ESG alternatives at the moment.
According to Impact Lens, the Montanaro Better World fund measures positive impact using an ‘Impact Calculator’ and seeks to invest in companies that solve sustainability challenges.
The Stewart Investors Asia Pacific Sustainability fund assesses each potential investment for social usefulness and environmental efficiency while Rathbone’s Ethical Bond fund only invests in issuers with environmental and socially positive traits.
All three funds returned at least 6 per cent in the year to October 4 and the Stewart Investors Asia Pacific Sustainability fund returned 10.85 per cent over the timeframe.
Impact Lens selected the funds using its system that rates each fund on its sustainability aims, ESG integration, stewardship, engagement and governance.
The agency launched earlier this year dealing exclusively with Helm Godfrey for the first 12 months while the brand is established.
It will then launch to the rest of the advice market.
imogen.tew@ft.com
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