The asset management industry’s ‘full speed ahead’ approach to providing environmental, social and governance investing has left advisers with a “minefield” of ratings, due diligence and fact-finding potholes to navigate.
ESG investing has boomed in popularity over recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.
Morningstar’s latest report showed assets held in ESG funds worldwide hit a record £810tn in June this year as investors pumped £54bn into sustainable products in Q2 alone.
Fund houses have been quick to respond to the ongoing trend with numerous fund launches.
But the complex nature of a client’s ESG choices, the sometimes contradictory and flawed rating systems and fears of ‘greenwashing’ have created a confusing and challenging maze for advisers, experts have warned.
The recent Boohoo scandal was a prime example of the issue – the fast-fashion retailer was given an AA rating by MSCI for above-average labour standards just weeks before The Sunday Times reported in early June workers making its clothes were paid below minimum wage and suffered poor working conditions.
Boohoo has since announced an independent review of its supply chain, though it has said there were inaccuracies in the reporting that made the allegations.
It has since emerged 20 ESG funds had invested in Boohoo. These included Aberdeen Standard’s UK Ethical Equity and UK Impact Employment Opportunities Equity funds, which held it as its largest single holding.
Manager Lesley Duncan said she had engaged with Boohoo about its ESG performance over a period of years and felt progress was being made, but she concluded the company’s response to the recent allegations was “inadequate in scope, timeliness and gravity” and her funds sold their holdings in Boohoo in early July.
Boohoo was also held by the Premier Ethical fund, which has also sold its position since the allegations emerged.
Steve Nelson, insight director at the Lang Cat, said: “It is a minefield for advisers.
“What financial services is adept at is getting very quickly into ‘manufacturing mode’ and before you know it we have lots of ESG funds and risk ratings when it is clear the notion of what exactly ESG is isn’t mature enough yet or fully defined.”
He said there was a series of processes available that “spit out a rating” that just “would not pass the sniff test of a human being”.
Mikkel Bates, regulatory manager at FE Fundinfo, agreed. He said: “You cannot expect investors or even advisers to have a clue what the difference is between the ratings, or keep up with company changes.
“It’s not easy at all as there are several aspects to the question – the client’s values, what the regulator expects, how the asset manager behaves. ”
What to do
Advisers have been urged to delve into their clients’ ESG preferences thoroughly to ensure the fund matches their values.