There are about 200 funds classified under the broad church of ESG (environment, social and corporate governance). However exactly how many of these can truly be classed as ethical, sustainable or as having a positive impact, is another matter entirely.
It’s an area where investors could slip up if they haven’t done their homework.
Gambling firms, tobacco sellers and arms dealing will often be excluded from these types of funds. Yet companies involved in oil, mining, animal testing and banking – with few restrictions on who they work with – can often make an appearance.
Clearly, it is an issue of personal ideals and morals. As Claudia Quiroz, Quilter Cheviot’s head of sustainable investments, said: “What might be ethical to me might not be ethical to you.”
She added: “I do read about funds that invest in ‘best of class’ and I look at the holdings and I might not agree with what is in there. The devil is in the detail.
“It’s important to read the small print and know what the manager means by ethical.”
For a manager or adviser, the onus is on them to understand the nuances of the wider ESG market, the preferences of the client, and ultimately what the fund manager is aiming for.
Jason Hollands, managing director at the Tilney Group, said it can be a difficult area to navigate, with no standard definition or expectation of what being ‘ethical’ should mean.
“There are lots of areas where the view of what should or should not be in a fund will be different and that’s why it’s a more complicated process picking these funds to build a portfolio,” he said.
Getting your head around the screening process and values of a fund is a big job, and an even bigger one considering the wide variation in how funds work.
Some exclude companies based on pre-determined criteria, others focus on wider themes within industries and others can be leaders in ESG, choosing only companies who rate highly across all areas.
It is the option of choosing the ‘best in class’ where discrepancies might arise if essentially the fund manager justifies the investment as the best of a bad bunch.
Wellian Investment’s CIO Richard Philbin recently wrote about the many ‘shades of green’ in the ethical fund space.
He said: “A long time ago I once met a manager who had BP in their portfolio and when quizzed about it due to what the company did – what with burning fossil fuels poor governance, disregard for the environment and so on, responded with ‘well, it’s better than Shell’”.
