Mark Armstrong has a rigorous process when it comes to sustainable investing, as he looks to assemble stocks that have a true impact.
The founder of Blue Sphere said the advice firm did not stop at ESG screening "because we don't believe it's good enough".
Instead it follows a three-layer process that allows it to screen out companies not deemed 'ethical' before screening out those that don't meet environmental, social and governance principles.
It also screens in stocks that have a positive social or environmental impact.
This is called impact investing.
"We really, truly believe - and when we speak to clients [about] what they think ethical or ESG investing is - it's actually impact investing they're seeking, not ethical or ESG," said Armstrong.
Research from Boring Money carried out this year showed conviction, or impact, investing has become a priority for many investors in the UK, as 14 per cent of ESG investors are now so committed to sustainable investing they put ESG criteria first and performance second when selecting investments.
But Armstrong said there were still hurdles to jump in communicating impact investing to clients, as there was not yet a consensus on the right terminology to use.
"Ethical and ESG is the banner that the industry uses a lot and is in a lot of people's language. But what they're actually talking about is impact," he said.
"They want to invest in a way that not only provides them with a financial return but also is having a positive, measurable social and environmental impact."
And it's not just clients who get confused by the terminology, the industry too was taking ESG to mean a variety of different things, he said.
"We really need to define what we mean by ESG. Are we looking at how the company affects the environment, ...or are we looking at it from how the environment affects the company's profits moving forward?"
The common end result of confusing terminology is what many refer to as greenwashing. Although for Armstrong greenwashing is "lying", for others it doesn't always have to be intentional.
As ESG veteran Julia Dreblow, director of SRI Services, told FTAdviser: "Some greenwash allegations result from differences in opinion, and sometimes greenwash is simply overexuberant marketing borne of inexperience."
She added: "There are funds that have shocked me, where it seems unlikely that over-exaggeration was accidental, and some fund names should be changed - but such examples are in the minority."
The problem often presents when there are so-called ESG funds that have stakes in companies such as oil producers.
Some ESG investors believe there is merit in helping non-ESG companies transition to a greener business model, which can be an ESG strategy in itself.
But for Armstrong, companies such as oil producers or mining firms are unlikely to make the cut, unless they transition away from fossil fuels completely.
"There is an argument to say, well, you know, let's invest in those companies to help them transition. The way we would look at that from an impact investing point of view is, at the end of the day, the end product is still oil. So it really depends upon the company itself."
If they are the "right" businesses, he recognised the importance of helping them transition over, he said.
Regulating the 'wild west of greenwash'
To get to the level of detail he needs to get to in order to select the right investment targets, Armstrong uses a number of discretionary fund manager partners for research purposes, as well as doing his own research.
This was "to really whittle down and make sure that when we lift the hood and really look at the detail, actually what we're presenting to clients is what we say we're doing," he said.
He added the level of company reporting was still a challenge with "an awful long way to go" but it has been getting better.
Armstrong believes ESG and its definition should be regulated.
The Financial Conduct Authority is currently drawing up rules for investment labels, which should allow investors to make more informed decisions on ESG strategies.
"It's the first stepping stone," said Armstrong. "It's good that we're getting some regulation in to try and stop the wild west of greenwash, whether it's going to meet what we need as an industry to get to where we need to get to in terms of complete clarity I don't know yet."
The FCA is also mulling rules for advisers, effectively forcing them to raise ESG with their clients. But Armstrong warned this could end up becoming a 'tick-box exercise" for advisers.
"We need to make sure as advisers we're having the right conversations with clients about really exploring their values," he said.
"It's our job to make sure that we're bringing sustainable and impact investing to our clients to explain to them what it is and not wait for them to ask."
He said the main point was to give clients a choice of options, not to "layer on our own beliefs".
When it comes to investing, choice has proliferated as the market matured, which has made it easier to build portfolios, Armstrong says.
"Initially, we might have had to have a heavier weighting in cash because there might not have been as good bond structures as there are now but there's more and more bonds coming online as the market matures so it's getting easier and easier," he said.
Blue Sphere has deliberately positioned itself as an impact investing-focused advice firm. The reason, said Armstrong, was ideological.
"We've nailed our colours to impact investing because as a business we want, and I particularly want for my family, to have at least done the best that I can do in terms of what we can for climate change and for the environment and for people.
"Because ultimately as an adviser it would be great to know that after the end of a career that not only have we helped people live the lives that they've wanted to achieve with their money but we've done so in a way that's benefited others as well."
carmen.reichman@ft.com
