An adviser has called for the creation of a clearly defined investment sector for environmental, social and governance funds to help with financial planning firms’ due diligence.
Speaking on an FTAdviser webinar today, Minesh Patel, adviser and director at EA Financial Solutions, said he found the review and selection process of ESG funds a “very difficult area to navigate”.
He said: “I would definitely like more assistance in that area. If you have a normal global equity fund, you would go to the sector to compare it.
“But the sustainable area runs across a number of sectors. It would be nice to have a sustainable sector, or an ESG sector, or an ethical sector that was clearly defined by the regulator.”
Mr Patel said it was important to get more clarity in the ESG space because the various terms and mismatching sectors “produce confusion” and “confusion produces lower take up”.
As part of the due diligence process, Mr Patel suggested checking the longevity of a fund manager’s work in the sustainable space and their views and work on shareholder attitudes more widely.
Gavin Haynes, investment consultant at Fairview Investing, agreed ESG due diligence was an uphill battle for advisers.
He said: “There are no shortcuts. The only way to avoid greenwashing is to look under the bonnet. It is increasingly becoming a whole new strand to researching funds.
“The industry really has to work to make it easier to avoid those who are just paying lip service to it. There needs to be some clearly defined parameters put in place.”
When judging the performance of her own ESG fund, Camilla Ritchie, senior investment manager at 7IM, said she would judge the portfolio’s performance against similar style funds, and against the market as a whole.
But she added: “It is also important to think about the ESG aspects. Does it have a lower carbon footprint than a traditional fund?
“You can measure in a number of ways how you are performing in other factors, including social and governance. That is really important when looking at the performance of these sorts of funds.”
2020: the year of ESG
ESG investing has boomed in popularity in 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.
Recent data from Morningstar showed global assets in sustainable funds hit £930bn in the third quarter of 2020, a record high, after investors pumped £62bn into such funds in the three months to September.
Speaking on the webinar, Terence Moll, head of investment strategy at 7IM, said the industry would look back on 2020 as “the year in which ESG really took off”.
He said clean technology, the regulatory drive from governments across the globe and an increased client demand were the driving forces of ESG, while Covid-19 had given the sector a “huge boost”.
He said: “In a few years' time, I think virtually all investing will be ESG.”
Mr Patel agreed, adding that the outperformance of sustainable assets during the recent market downturn would “accelerate demand”, while Mr Haynes said 2020 had redefined how investors and regulators reacted to ESG investing.
It was unlikely to peak this year, too, the experts said.
Asked about how big of an impact the US presidential election may have on ‘green’ assets, Mr Moll said although there could be a dip in performance if Donald Trump won the vote, there was little risk “in the long run”.
Mr Patel added: “The voter of today and tomorrow will increasingly demand a politically green ideology before they vote. It is only going in one direction.”
imogen.tew@ft.com
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