In Focus: Passive Investing  

The only way is ESG?

After comparing the exposure and impact of 281 US-domiciled sustainable equity funds against the UN's 17 sustainable development goals, it found a significant disconnect.

While 77 of the fund names used the words ‘green’, ‘climate’, ‘clean’ or ‘sustainable’, only a tiny proportion (four) had a positive impact across any of the environment-related SDGs.  

The wide range of terms to describe ESG investment has been a bugbear and can cause confusion for investors. As Edward Park, chief investment officer at Brooks Macdonald, observes: “ESG is an area fraught with issues over taxonomy.”  

Given the concerns about the impact on the end user, this needs to be addressed effectively. 

Jeannie Boyle, executive director and chartered financial planner at EQ Investors, says: “We need to make sure information is presented in a consistent and meaningful way, which allows investors to make informed choices about what is suitable for them and helps prevent greenwashing.” 

Boyle points to online sources of information that can be useful for investors, but she also points to where the buck stops.

“There are places people can get help, such as Good with Money and Fund EcoMarket, but it needs to be fund groups who supply information about their approach to ESG.

“It’s clear that more of us want to act and do something about today’s issues, whether it’s social and economic inequalities or climate change, and investing is a powerful way to make a difference.

"We should all welcome the direction of travel, but we need ESG standards that are followed by all the players in the industry."

The future of ESG

When considering the future for businesses who do not adopt environmentally friendly ways or meet ESG criteria more broadly, Glassey does not believe they will be ‘cancelled’. 

“Let’s look at this rationally: non ESG/socially responsible companies will still be listed on stock markets. Are we saying that no one will invest in them? I think that unlikely.”  

However, others take a different view. Paris Jordan, multi-asset analyst at Waverton Asset Management, says: “Those firms that resist becoming environmentally friendly will quite frankly go out of business. Initially, clients will vote with their feet and then regulators will demand change, which could result in huge costs to the lagging firms.” 

Regardless of the direction of debate around what it is and what it is not, ESG investment continues on its steady path of being perceived as a must have by many. 

A recent survey of institutional investors indicated that ESG had made further advancements in a short space of time. The BNP Paribas ESG Global Survey, published in September, found that ESG is “maturing quicker than predicted”.