Long Read  

Does ESG have a future?

"I had a look at three different reports [earlier] and environmental dominates all of them, to the extent that the social is often just a few lines. ESG in Europe right now is just environmental, but we are starting to see the launch of thematic funds.”

Tom Sparke, investment director at discretionary fund house GDIM, says: “I think some parameters need to be set – will the fund strive for the best in E, S and G, or accept that some negative aspects are a natural by-product of change?

"Examples such as mining for the natural resources essential for electric vehicles or the positive impact of Tesla being overshadowed by its poor governance are just two of a plethora of issues that ESG allocators must face.”

Thematic funds would likely focus on a particular ESG theme, for example, social inclusion, and are not aspiring to be catch-all funds.

Baig views thematic approaches as individual “solutions” to suit different clients, and says that new thematic ESG funds will be launched by Aviva Investors in response to client demand. 

His company offers both a dedicated environment fund and a dedicated social fund, and while both are marketed as ESG funds, “we would never expect two such funds to have completely the same holdings, but we think thematic is going to be important in the years to come”. 

Kenny says that while thematic funds are launching, he thinks they will be in addition to, rather than instead of, generalist ESG funds. 

In contrast, Sparke says thematic funds may be the future of ESG. He says: "I do think that the future may be for more focused funds, to deal with certain issues. I think that a low-carbon-focused fund or a socially responsible fund could make more of an impact than a fund that is broadly skirting all of these issues."

Lisa Beauvilain, global head of sustainability at Impax Asset Management, says one has to start from the premise that “there is no perfect company”, and focus on whether companies are moving in the right direction on each of the issues, something which may involve clients making short-term compromises, but the nature and extent of these compromises may also challenge each individual client's perception of what they are investing in and why. 

Regulation

The Sustainable Finance Disclosure Regulation, and whatever comes from the UK, are an attempt to provide a framework along the lines advocated by Sparke, with a fund classified by its level of intent around ESG. 

Hugh Cuthbert, fund manager at SVM, says a more generalist approach to ESG may be more appropriate for most clients, but the present SFDR system of regulation, which classifies ESG funds according to certain criteria, is unhelpful for those seeking to have a broad ESG exposure.