"Nuclear power is a good example of an investment that investors across Europe have very different attitudes towards. When it comes to ESG investing it’s important for investors to do their due diligence, to make sure they are in products that align with their individual values.”
Amer Khan, European managing director of ESG consultancy firm Entelligent, says the next stage of development for ESG index funds will be the adoption of internationally-recognised definitions of ESG as this will lead to the creation of index portfolios aligned with those definitions, reassuring investors that the portfolios contain the types of investments they are happy with.
Mr Khan adds that ESG funds which merely seek to exclude certain investments are now “last year's news”, as the market moves in the direction of launching passive investment products which aims to include investments that have a positive impact on the world.
Jake Moeller, senior investment consultant at Square Mile research, says: "There are now an increasing number of responsible indices coming to market such as FTSE4Good.
"An investor really needs to appreciate the composition of these indices and feel comfortable with their methodology. If an index is exclusionary only, it may not tick a client’s sustainability objectives especially if they are more solutions-focused.
"A low carbon index which focuses on, say, carbon emissions as a percentage of revenues could potentially include a petroleum company. Investors really need to know the index inclusion/exclusion rules."
Rule breakers
Barry Cowen, senior portfolio manager at Sanlam, a wealth management firm, says that as long as the product provider is clear about the types of investments that are held within the index fund, but says the rules need to be very specific in order to be effective.
He says: “Index ESG funds require a specific set of criteria, rules, under which they invest. Such rules mean what they will and won’t buy should be fairly clear.
“So apart from a degree of qualitative interpretation, clear rules bring merits. ESG funds have been more niche and generally require additional oversight, including sometimes independent external committees.
"That means costs. So ESG product has to date, in general, been uncompetitively priced. ESG solutions thus appear more expensive, which may not sit well with a ‘positive outcomes’ mindset for some investors – why should I pay more to do the right thing?’
"Tracker ESG funds help. The downside is, ESG is highly qualitative. So broad rules may not provide the desired effect."
Charlie Parker, managing director at Albemarle Street Partners, a discretionary fund house says: “There is a growing industry of green indices and even now green gilts that are helping support investors who wish to invest ethically but still passively. This is emergent and investors must note that it necessarily introduces particular sector biases that will work at certain points of the cycle and not at other times.”
