ESG funds
Dear Holly
I’ve been running my own investments (an ISA and a SIPP) for about 15 years. It’s worrying me that I don’t currently hold any ESG funds in either wrapper. There are plenty of funds around, rather aptly named, but I’m mindful this is could be a reflection of work by some clever marketing people, rather than what the fund actually does. How does one begin their ESG journey?
MJ, Peterborough
Holly says
Investing responsibly is becoming increasingly important to investors – I’ve had lots of letters asking about it. You are right to question the accuracy around the labelling of funds – it’s something that the Investment Association (IA) and other industry bodies have been concerned with.
It’s important that funds are clear about what they are trying to do. But it’s been suggested that firms have marketed products and investments to appear more sustainable and ethical than they really are – this is known in the industry as greenwashing.
Ethical framework
The IA recently admitted that the lack of a common language has been a significant barrier to the growth of responsible investment. It has come up with a framework, which is a step in the right direction. One of the things it has focused on is the fact this kind of investing is known by many names. Among them: socially responsible, ethical, impact, sustainable and ESG (environmental, social and governance).
A universal labelling system for funds is in the pipeline but these things can take months and even years to get sorted, so it’s up to individual investors to wade through the choices. There are currently several different ways in which you can access responsible investments in the first instance. Some funds aim to exclude certain industries that do harm, such as tobacco companies or fossil fuels.
A more modern approach is for the manager to round up what is seen as the most promising stocks dedicated to sustainability. Some funds focus on impact stocks – those which focus on positive effects.
Crucially, fund managers are becoming more and more involved in improving the companies they invest in, using engagement. They will throw their shareholder weight around (in a professional manner, of course) to encourage better practice whether that be under the environmental, social or governance areas of the ESG banner. They assess companies across a range of areas, often reflecting priorities laid out in the UN Sustainable Development Goals.
Dig deeper
So, how to decipher what’s a decent fund that does what it says on the tin? The weighting of different environmental, social or governance factors may vary from fund to fund. When you see a fund you like the look of, take time to carefully review the fund fact sheet to find out the manager’s philosophy and the top ten holdings or more if they provide them to learn about how your money will be invested.
You can find information on ethical funds on your platform’s website. You don’t say which platform you hold your investment with, but most have plenty of information on responsible funds.
Some platforms have introduced their own responsible investment ratings which can help investors find the right fund. interactive investor, the UK’s second largest retail investment platform, has launched ‘ACE 30’: the UK’s first rated list of ethical funds, ETFs and investment trusts.
Earlier last year Nutmeg launched a range of socially responsible portfolios, and (ESG) scoring for all Nutmeg portfolios. Each category is scored from 0-10, where a higher score signifies better adherence to the corresponding principle from the underlying companies. I can only imagine there will be more ratings offered to investors this year to help with your choices. Plenty of robo-advisers offer ethical portfolios including EQ Investors, Wealthsimple, Plum, Tickr and Wealthify. Find out more here.
I’ll keep you posted.
Photo by Craig Whitehead on Unsplash
