As an adviser, how can you ensure that you meet your clients’ needs by making use of the similarities and differences between the different sustainability funds which are available in the UK today? Julia Dreblow Director SRI Services and founder of the Fund EcoMarket fund tool sheds some light on this exciting sector which is growing rapidly in importance
My previous article which appeared in the May edition of IFA Magazine ended with a climate change related quote from Mark Carney, Governor of the Bank of England where he said ‘…the task is large, the window of opportunity is short, and the stakes are existential’. Since his speech in March the focus on this area has increased dramatically.
Extinction Rebellion has grabbed headlines calling for the recognition of a ‘climate emergency’, Greta Thunberg has taken the country by storm, David Attenborough has articulated his fears in the documentary ‘Climate Change the Facts’ – and the Climate Change Committee has mapped the UK’s route to ‘net zero’ carbon emissions, by 2050.
Some of this you may love. Some you may loathe. But unless you have been away on a desert island you will have found it impossible to have missed it all.
As members of the somewhat elite finance and investment ‘gatekeeping community’ you should not seek to overlook it either. Your work puts you (and your interested clients) in a fantastic position to do something about climate change – and if that is not enough, it is very clear that much money will be made and lost as a result of climate change and sustainability issues over the next few years.
But how do you carry out effective due diligence on the investment funds which operate in this exciting sector? In this article I will explore the variation in sustainable investment fund choices and why they suit particular clients with their differing opinions and financial objectives.
The starting point
Firstly, you’ll need to identify fund options that have a genuine emphasis on sustainability, either through their themes, screens, objectives or investment universe.
However, understanding how funds with sustainability stategies actually operate can be somewhat baffling – and a genuine concern, given that Googling fund holdings is an ever-present option for clients. (‘Greenwash’, for the record, is a genuine risk in this area, but the far greater risk is misunderstanding funds through a lack of information.)
The way forward lies in understanding fund strategies and gathering ‘evidence’ as required.
The power of three
The first point to recognise is that there are many ways to support and encourage more sustainable business practices and therefore lifestyles. Fund managers have three main strings to their bow: deciding ‘where to invest’ (positive stock selection), deciding where ‘not to invest’ (avoidance – whether explicit or implicit) and through the relationship they have with investee companies (responsible ownership/stewardship).
All three are important but need not be employed in the same way by all funds.
Some of the areas we focus on when trying to understand or classify a fund include:
- What does the fund strategy say about ‘sustainability’? How does the manager describe their strategy? eg a focus on ‘positive impacts’, helping to ‘effect change’ or improved ‘risk management’?
- Where does the fund invest? And do holdings look like they align to fund objectives?
- Are some (or many) industries out of bounds?
- Is there publicly available evidence of voting, engagement or other significant stewardship (responsible ownership) activity?
- What resources do they employ, inhouse or externally?
- Do they collaborate with (and learn from) others to amplify their work?
- And finally – is the manager keen to communicate their activity – or would they prefer people like me to stay away!?
With the exception of the final point, all of these are highlighted on our free (fund manager sponsored) Fund EcoMarket database – which is my way of contributing to transparency and amplifying my experience in this sector!
The following three groups (‘or straw men’) are based on the ‘Policies’, ‘Approaches’ and ‘Corporate Activity’ filters on that tool – and aim to help illustrate common combinations, and their benefits:
Group 1. Large-cap weighted
- Stock selection: significant large-cap exposure, invested across most sectors, favouring ‘best in sector’ companies that show ‘sustainability leadership’ relative to their peers.
- Risk management: carry out extensive ESG research to help reduce risk.
- Active Ownership: vote shares at AGMs with the aim of encouraging often very large companies towards more sustainable business practices.
- Core aim: to deliver competitive performance by investing in companies that display strong sustainability policies and practices.
- USP: can play an invaluable role in helping to deliver potentially game-changing progress in very large companies.
These funds may hold investments that surprise clients, such as FAANGS, banks and occasionally oil or mining companies, however advisers often like their alignment to conventional benchmarks.
If queried, advisers should check fund manager ‘stewardship’ activity, particularly votes against management and resources – especially for passive funds with light exclusions.
Active fund managers with options of this kind include: Sarasin Partners, M&G, Quilter Cheviot, LGIM, Royal London, Pictet, Stewart Investors and Brown Advisory.
Group 2. Small & mid-cap weighted
- Stock selection: significant exposure to small and mid-cap companies that are delivering or developing solutions to environmental and social challenges.
- Risk management: managers typically know their companies well and may review some elements of ESG on a company by company basis – focusing on relevance and materiality.
- Active ownership: relatively few engagement opportunities given the nature of the companies held.
- Core aim: to deliver competitive performance by invest in future winners – companies that are innovating, driving or facilitating the shift towards more sustainable lifestyles.
- USP: can play an essential role by driving much needed investment towards often smaller pure play, positive impact, solutions companies.
Clients often love to invest in companies that are focused on solving problems like replacing plastics, clean energy, resource efficiency etc – but possible deviation from standard benchmarks can worry advisers.
Advisers should consider the benchmark the fund uses (or their own preferred benchmark) and sense check its constituents against the client’s opinions, investment term and external factors such as regulatory shifts.
WHEB, Foresight, Triodos, M&G, Jupiter, Montanaro and Impax all offer funds of this kind.
Group 3. Wide (sustainable) investment remit
The third group combines elements of the two strategies above typically employing positive, sustainability-focused stock selection to gain exposure to both ‘pure play’ companies and some larger caps.
Contentious activities are mostly avoided and engagement activity is focused on any grey areas. ESG risk is minimised through research, with judgement calls made if a risk is considered acceptable.
Engagement opportunities are however lower than for Group 1 (because of where the fund invests) and exposure to ‘pure play’ (specialist) companies is lower than Group 2. However, as fund assets grow there may be important opportunities for both.
Funds of this kind are available from Liontrust, EdenTree, Kames, Rathbones, Pictet, JanusHenderson, Jupiter, Triodos, Sarasin and Partners and Standard Life.
This group accounts for around half of the 43 onshore sustainability-themed OEIC funds available today, as well as many ‘ethical’(screened and themed) funds and ‘environmental’ funds. (Noting that funds vary and some managers have multiple strategies.)
To delight clients with funds that closely match their personal aims, we recommend that advisers read the additional information supplied by fund managers as this can provide an important insight into fund strategies and ‘what makes the fund manager tick’.
Heading down this route can also be a journey of discovery for advisers – and clients -too. Many advisers have reported that sustainable investment offers unparalleled opportunities to demonstrate the value of ‘one to one’ financial planning advice – and takes their client relationships to a whole new level! What’s not to love about that?
About Julia Dreblow
Julia Dreblow is a founding director of SRI Services and runs the fund manager supported FundEcoMarket.co.uk tool that is designed to enable financial advisers to match clients’ aims to sustainable, responsible and ethical fund options. She has been a leading proponent of this area for over 20 years and in addition to running Fund EcoMarket, being a director of UKSIF – and on various advisory boards – does consultancy, policy consultation work, media, events and speaking engagements.