With growing interest in sustainable investing, it seemed only a matter of time before boutiques like Fundsmith launched a sustainable version of their flagship fund.
But as more funds with a sustainable mandate are launched, there are increasing concerns over whether some are just paying lip service.
So, fund manager Terry Smith’s first principle is to look for great companies that reinvest cash flows to generate future growth.
The team at Fundsmith have concerns around how environmental, social and governance criteria is applied, as it is often conducted on a best-in-class basis, comparing companies within a sector and not across it.
This throws up some anomalies and does not speak to the sustainability of a business.
It means that it is hard for an investor to compare two funds as the scores might not translate well.
Fundsmith carries out independent assessments of the negative reputational risks from ESG factors as this allows the managers to rank companies in an absolute manner.
The fund combines its stock-picking expertise and applies some filters to it to avoid the more unethical and unsustainable areas of the market.
Some of these sectors were already being excluded by Fundsmith based on its existing investment principles, as it did not think they offered long-term sustainable investment growth.
Once the filter is applied, Fundsmith then returns to its strengths and conducts its own research, looking at ESG and innovation factors.
The process is very data driven, with all quantitative information loaded up on their database and tagged so they can monitor changes.
Using relevant data, they look for companies that have superior ESG metrics to the S&P 500.
The result is a fund that, on the surface, might not look too different from the mainstream fund, but that is largely because there were already processes in place that filtered out some of the worst traits of companies with low ESG rankings.
The fund charges are slightly higher than the existing fund, with an ongoing charges figure of 1.05 per cent compared to 0.95 per cent.
While there is some additional work being carried out, the likelihood is most of it will benefit the research across all funds, although the higher charges will no doubt put some investors off.
