How to tell if a fund group really integrates ESG

Square Mile's John Fleetwood says selectors must go beyond ratings, commitments and marketing to assess ESG integration

Increased demand from investors who wish to do good with their money as well as make a financial return, alongside demonstrable evidence that ESG and responsible investment can enhance performance has meant fund groups are tripping over themselves to bring ESG and responsible investment products to the market or redesign existing funds as ESG-compliant.

With this greater interest comes greater scrutiny. Fund selectors need to be able to distinguish between those groups where ESG considerations are integrated into culture and processes, and where strategies have a hardwired responsible investment mandate, and those who have just given a lick of green paint to their product shelf. But how can advisers tell whether a company really ‘walks the walk’ when it comes to responsible investment?

This desire to know more about a company providing a product spans all areas of life and is reflected in public concern over how goods of all kinds are produced. From favouring organic and fair trade, to boycotting companies associated with sweatshops, consumers want to know what sort of company they are really dealing with, as well as the sort of product they are buying.

This is to be expected. After all, what is the point in buying a product on the basis of its ethical or eco credentials when the rest of the products made by the manufacturer are harmful or if their supply chain is compromised by malpractice?

This same expectation now extends to investment. Square Mile carried out research among financial advisers over the last quarter of 2020 and found that more than three quarters (79.8%) of those surveyed believe ESG and responsible investment should be integral to a fund group’s culture, not just the preserve of a responsible investment team.

As asset managers continue to launch new products in this space, advisers and investors expect those companies they partner with for responsible investment funds to turn the mirror on themselves and take a critical look at their behaviours across their business as a whole.

Looking deeper

However, interrogating a business on how deep ESG and responsible investment runs through its operations is not a straightforward task. It requires an in-depth audit of an investment provider to demonstrate the extent to which the provider embraces responsible investment or whether it merely pays lip service to it.

Asset managers can be very good at producing convincing marketing materials to showcase specific responsible investment initiatives, but this does not always tell the full story, nor does it provide a consistent way of comparing asset managers to help ascertain who the true leaders are.

When it comes to ascertaining whether a firm lives up to its responsible investment credentials, it is crucial to look across various aspects in order to gain a comprehensive view.

First, the level of capability across the asset manager; looking at the investment they have made in responsible investment systems, going beyond bought-in ratings.

Second, understanding the broader level of commitment across the fund group; do they practice what they preach in terms of internal operational practices, such as paying its fair share of tax, a commitment to zero-carbon targets and the procurement of renewable energy and philanthropy?

Beyond understanding the fund group’s commitment and capability to responsible investment, we want to know how they are actively supporting change, be it through engaging with investee companies or participating in wider initiatives to enact positive change.

Finally, although marketing materials are a useful tool to showcase an asset manager’s responsible investment, transparent and substantive reporting and communication are essential to evidence their credentials, be it through engagement, voting or sustainable outcomes.   

The fact that responsible investment has moved to front and centre of investors’ preferences when considering their options is something to be celebrated. While saving for their future, individuals can put their money to play in a way that helps secure a future that is cleaner, greener and more equitable for all.

However, there is the potential for grave reputational damage should investors suspect that those with whom they entrust their money are trying to profit from a green veneer. Investors demand and deserve more than that, and to have credibility it is imperative that responsible investment runs through a fund group like the grain through a piece of wood.


Natasha Turner

Natasha is global editor at ESG Clarity, part of Mark Allen Financial, and has been a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the...