Ethical Investing  

Advisers warned of 'cynical' ESG fund launches


Advisers need to be aware of "cynical" launches of environmental, social and governance funds, an analyst at Hermes Investment Management has warned.

Maxime Le Floch, a senior analyst at Hermes, was responding to questions about how advisers can tell the difference between funds that are genuinely ESG, and those that are effectively "branding" exercises.

He said: "We have been observing, with the growth of those investment strategies, there has been great innovation but also more less informed, or even cynical, approaches with these fund launches.

"I would look at three things. The first thing I always look at when I see new funds is going straight to the holdings, the top holdings or, if the fund provides it, the whole list, and trying to see 'do they make sense for how the fund manager describes their strategy?'

"The second layer from that is to look at the investment process and how they describe that. Do they have a clearly articulated way of selecting companies with a sustainability angle? I would privilege approaches that have an integration throughout the investment process as opposed to just one layer, one step, one screen. That wouldn't be enough.

"The third aspect is looking at the people and the organisation, and making sure the people who manage the strategy do actually have the skill set that is necessary.

"Of course we are investors and need very strong financial skills but we need a good understanding of sustainability. Having a mix of people from a traditional investment background and a sustainability background within the team, as opposed to outsourcing and overly relying on ESG ratings. That wouldn't be enough in my opinion."

Mr Le Floch said there was a "confluence of factors" which was leading to the growth of ESG investing.

He said: "We have been seeing over the last few years mounting evidence that, through academic studies, studies by professionals and the performance of the funds, that actually the case is being proven, that we have increasing data that shows the integration of [ESG factors] is helpful to financial performance."