INVESTMENTS
ONLY 30 PER CENT OF ADVISERS THOUGHT THEIR CLIENTS WOULD VALUE A CONVERSATION ABOUT ESG . IN REALITY , 72 % OF THE FUND INVESTORS SURVEYED SAID THEY WOULD VALUE THIS .
What are some of the challenges with ESG investing ? Greenwashing One of the biggest challenges has been the lack of uniformity in definitions . Terms such as ‘ responsible ’, ‘ sustainable ’ and ‘ green ’ can mean different things to different people . This can make it difficult for investors to know exactly what a fund was offering . As a result of the growing popularity of ESG investing , there was an abundance of funds launched with a buzz word such as one of the ones above . However , on closer inspection , in some cases there seemed to be little to do with ESG or similar in the fund ’ s process .
Inconsistent ratings Another challenge with ESG investing is the lack of consistency between ESG rating providers , both in terms of fund and company ESG ratings . Given the vast amount of ESG data points and the fact that each rating provider has their own criteria and weightings ( as well as other differences in methodology ), the correlation between the outputs of the various rating agencies is generally low . Low correlations make it difficult for advisers and their clients when selecting funds this way and they can also cause problems for investment managers relying on company ESG ratings , with the results of their screening changing drastically depending on which data provider is used . As a result , many funds now disaggregate the ESG data and apply their own weightings . As such , it is important for investors to be aware of what methodology the fund uses and what the criteria are .
Negative perceptions Perhaps , because of the above challenges as well as the misconception around performance being worse for ESG funds , some advisers have been slow to warm to the idea of ESG investing . According to research conducted by Boring Money in September 2019 , only 30 per cent of advisers thought their clients would value a conversation about ESG . In reality , 72 % of the fund investors surveyed said they would value this . Not surprisingly , this has continued to be the case since the start of the COV- ID-19 market volatility . At the end of April 2020 , Federated Hermes , an asset manager known for responsible investment , polled 200 advisers and found that 82 % had seen a rise in client requests to allocate capital to ESG focused funds .
What ’ s next ? Advisers need access to ESG data and fund research to fulfil their requirements and some reasonably detailed research will be needed before the adviser can recommend any ESG funds to their clients . Several firms now provide research and ratings for funds based on their ESG characteristics and integration of ESG factors . Our ESG Reviews for funds cover , among other things :
• the fund ’ s ESG policy and how well the fund aligns to it
• product involvement , if any , in certain controversial areas
• ESG integration as per the three levels described above
• any adherence to the UN SDGs
• the fund management firm ’ s voting and engagement policies with corporates on ESG issues
• the company resources in terms of ESG behind the fund .
Despite its challenges , the industry has seen a growing interest and an increasing number of fund launches in ESG investing . And there is no sign of this abating .
In addition , empirical research into ESG investing has shown evidence of a positive effect on returns , or at least no performance penalty . Companies that behave responsibly and incorporate ESG principles into their business are usually seen as better custodians of capital and , in turn , expected to provide higher long-term returns . P
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