Craig Hart: 10 years in ESG fund selection

King & Shaxson's Craig Hart reflects on a decade of ESG fund selecting

King & Shaxson Ethical Investing’s client relationship manager and ESG Clarity’s editorial panellist Craig Hart reflects on a decade of ESG fund selecting

Ethical investing isn’t new, we know that, with details of maybe the first ethical screen arising in 1758. Back then exclusions were predominantly driven by faith, but the market has certainly come a long way since then. 

Going back 10 years to when King & Shaxson launched its Model Portfolio Service (MPS), the availability of investible assets was limited to say the least. There were some funds out there with a good ethical heritage, but for every fund that passed our screen there was many that did not. That still rings true today, but our universe of available assets has grown dramatically.

Sometimes with the word ‘ethical’, people think its only avoidance we are looking to address. Yes, of course we do apply a negative screen to avoid the various ‘sin’ stocks, but there is much more to the investment process. Like the market responsible investing too have evolved. Whilst screening out sectors such as tobacco, gambling and fossil fuels to name but a few, many implement a positive inclusion, which by its very nature looks to invest in funds that finance solutions to various social and environmental issues.

Portfolio construction takes into account the whole spectrum of capital, from responsible investing right through to impact. There are many funds out there that look to address at least one of these themes, but recently a majority of the new funds that have launched have been focusing on impact, a theme that wasn’t very well covered 10 years ago. By selecting a wide variety of funds, you are not only addressing the vast majority of clients wishes, you are diversifying the risk of each portfolio; ensuring that exposure to individual companies, specific sectors or fund houses is limited.

Serious scrutiny

There are many external companies that provide very useful screening services, but it is important to use them as only part of the overall ongoing monitoring and analysis. By adding the external research to your internal investigations you will get a better picture of that investment, and whether the company or fund is where clients want their capital invested. Companies do change their practices and some that would not pass the scrutiny maybe five or 10 years ago are now investible as they seek to shape the company to be sustainable in the coming years. It is very important therefore that this research is constantly reviewed and updated.

Engagement with fund managers in this area is also very important, to make sure that they share and understand the views of underlying clients and that the fund meets the clients ethics. As previously mentioned, where companies change, client ethics change as well; before the LIBOR scandal most clients were agnostic towards financial services, that attitude has changed dramatically since. Similar moves have been seen in the auto sector surrounding diesel/internal combustion engines and questionable emissions data. Therefore, if you see a holding in a fund that does not look right it is imperative that you engage and if necessary challenge the fund manager.

Education around ESG solutions is key, including supplying advisors support material to aid client articulation of their ethics, through to monthly factsheets and client friendly brochures. Managing clients’ investments this way is becoming mainstream, and the pressure points with regards to sustainability have never been pushed so hard before. Given the current situation around covid-19 we expect the trend of investments looking to address health and well-being issues increase.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...