Investing responsibly is increasingly important to investors, and the COP26 conference will no doubt initiate a number of conversations between advisers and their clients around this topic.
But with around 4,000 funds available, and the number of environmental, social and governance-labelled funds rising, finding the correct fit for a client’s profile is a Herculean task.
Additionally, with no uniform industry-wide reporting, it is hard to compare like for like.
In an attempt to simplify this process, the Financial Conduct Authority announced this month that it will soon require intermediaries to take sustainability issues into account when advising clients.
This will include potential criteria to classify and label investment products in lieu of the EU’s sustainable finance disclosure regulation, which was not implemented in the UK due to Brexit.
The regulator warned in July that it was seeing a lot of applications for authorisation of investment funds with an ESG or sustainability focus that were not up to scratch.
“ESG and sustainable investment funds are currently the fastest growing segment of the European funds market, reflecting increasing investor appetite for these investments,” it said.
“Some funds marketed as ‘sustainable’ aren’t always as sustainable as they appear to be."Oscar Warwick Thompson, UKSIF“We have seen a high volume of applications for authorisation of funds with an ESG focus... a number of these have been poorly drafted and have fallen below our expectations."
Oscar Warwick Thompson, senior policy and communications manager at the UK Sustainable Investment and Finance Association, says “getting under the hood” of ESG funds is really critical for investors and savers.
“Some funds marketed as ‘sustainable’ aren’t always as sustainable as they appear to be,” he says.
“Strong, consistent regulations on the design and disclosure of ESG funds will be very important.”
While the industry waits for more concrete regulation, there are a number of tools advisers can use to select responsible funds for their clients.
"[Fund EcoMarket] aims to reduce the risk of users thinking a fund is ‘greenwashed’ simply because they do not understand the fund strategy."Julia Dreblow, Fund EcoMarketOne is Dynamic Planner, a financial planning software company, which earlier this year launched an ESG questionnaire for advisers to use with clients.
Jim Henning, head of investment services at Dynamic Planner, says the aim was to address all the reasons why advisers might not want to have a conversation around sustainability with their clients.
“[There are] reasons not to do it. But we’ve got to break through all that,” he says.
“We wanted to try to give [advisers] the chance to get comfortable with a new type of process.”
Henning adds that the high level of detail in funds’ sustainability credentials is easy to get lost in, and that does not engage clients very well.
So the company has created a questionnaire it hopes can be integrated into the processes advisers are already using to risk-profile their clients.
The risk-profiling business now gives advisers access to MSCI’s ESG fund research, as well as information on ESG issues for 36,000 funds.
What it does not do, however, is reverse-engineer the solution.
“This is where the advice firms need to be very comfortable with their own research in this space,” Henning says.
A tool that can be used by advisers to match up clients with funds is Fund EcoMarket.
This is a free-to-use database of sustainable, responsible and ethical investment funds designed for financial services professionals.
The site’s founder, Julia Dreblow, says the tool’s classification system is essentially designed to help guide intermediaries, and to assist them in matching the right fund to the right client.
The majority of the information comes directly from fund managers in order to avoid researcher bias.
“[It aims to] reduce the risk of users thinking a fund is ‘greenwashed’ simply because they do not understand the fund strategy,” Dreblow says.
“[This] effectively takes the place of [advisers] having to carry out [their] own research.”
If the adviser wants to explore the funds themselves, there are a number of ways to do that, says Steve Kenny, chief distribution officer at Square Mile Research.
This includes the Investment Association’s responsible investment framework, which provides good guiding principles, outlined by the industry trade body.
He adds that company websites are also a good place to start with fund selection, and can show how the business treats certain issues.
Most fund managers will have a section of their website dedicated to sustainability, and many have their own sustainability frameworks that outline their own thoughts on how they invest.
“[It’s important to look at] the prominence of responsible investment on the fund group’s website,” he says.
“This will speak volumes in terms of the importance they attach to this area.
“For example, is it a small component with little information, or is it a dedicated, easily accessible area of the website, illustrating key metrics and detailing governance actions?”
He adds that advisers should look for sustainability reports for the fund group, and independent assessments.
“From a fund perspective, what does that say about its objective and ambitions? And how are they evidencing achievement of expected responsible investment outcomes?”
It is increasingly up to the adviser to do the research on sustainability credentials within funds. Hopefully tighter regulation in the future will be able to ease this burden.
sally.hickey@ft.com
