Sustainable investing (or ESG/green/clean if you prefer those labels) has exploded in the last few years across the investment industry.
From being a niche area, it has now become mainstream in fund management as more clients become aware of the impact their investments have and look to invest in companies aligned to their values.
Last year, inflows to the sector near quadrupled, with Investment Association stats showing net flows of £7.1bn in the nine months to September this year — 275% more than the £1.9bn measured in the first three quarters of 2019.
From global warming to human rights, the ESG agenda is here to stay, but as an investment concept, it continues to face challenges. With more investor demand for both returns and also positive environmental and social outcomes, fund managers have adapted their solutions with some accused of jumping on the bandwagon and “greenwashing” their funds.
This makes sustainable investing something of a minefield, and knowing what solution is most suitable for clients can be a tricky one for advisers.
Below, using our own experience of questioning fund managers, we have collated some of the key questions advisers should be asking fund groups to give them the best possible idea about the sustainable solutions they are investing clients in.
Questions for asset managers at a company level:
How embedded is ESG and responsible investing in the company’s culture?
This is a key issue and seeks to tell us whether they truly believe in ESG, or whether they are just box-ticking. Questions to help delve into this include:
What industry bodies are they aligned to?
Are they a signatory of the UN PRI? If so, what is their rating across the different components?
What other initiatives are they aligned to? E.g. Climate Action 100+?
It’s also important to know how transparent fund managers are. It’s one thing to say you are interested in ESG and sustainability and another to actually walk the walk.
One way to assess this is to ask asset managers whether their responsible investment policies are public, do they report on their engagement with companies, and can they show their commitment to TCFD?
How do they stack up versus their peers?
Independent reports by initiatives such as ShareAction and InfluenceMap show how some the largest asset managers compare when voting and engaging on ESG issues, and this is something clever marketing can’t hide.
However, advisers can delve deeper on this. For example, they can ask how important is ESG in their wider company strategy, and who’s responsible for setting the strategy?
It’s also worth asking whether they have a dedicated team inputting on ESG. Beyond that, advisers can ask up front about key issues including:
What is the company carbon footprint?
How diverse is their board?
What is their gender pay gap?
Questions for specific fund teams
As many advisers know, the key to getting under the skin of any fund is to speak to the fund manager to find out how it works in practice, beyond the marketing documents.
Any questions for fund managers will be dependent on the strategy an adviser is looking to implement (e.g. what asset class, how far along the ESG spectrum – full impact investing or index tracking with an ESG tilt?)
However, there are also some questions that can indicate the level/quality of ESG integration, including:
Are portfolio managers using consistent integrated tools to measure ESG and financial characteristics?
Or are ESG considerations a bolt on process?
Can they give some tangible examples where ESG considerations truly impacted an investment decision?
What about stewardship – have they examples of where they have successfully influenced an underlying company?