1.3 Exclusions
Also referred to as negative screening and the predominant approach of many ethical funds. Exclusions prohibit certain investments from a firm, fund or portfolio. Exclusions may be applied on a variety of issues, including to align with client expectations.
They may be applied at the level of:
- Sector
- Business activity, products or revenue stream
- A company
- Jurisdictions/countries
There are many different types of exclusion including:
• Ethical/values-based/religious (e.g. alcohol, firearms, pork)
• Norms-based (e.g. companies involved in human rights violations/corruption)
• Poor sustainability (e.g. oil companies)
• ESG assessment (e.g. worst rated ESG companies)
Funds with exclusion criteria were among the first wave of ESG products in the market.
1.4 Sustainability Focus
Defined as: “Investment approaches that select and include investments on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcome(s). Investments are chosen on the basis of their economic activities (what they produce/what services they deliver) and on their business conduct (how they deliver their products and services).”
There are different types of sustainability focused strategies. Examples include:
- “Sustainability Themed Investing” focuses on companies that provide solutions to sustainability problems (such as pollution prevention or climate change mitigation).
- “Best in Class” focuses on using some sustainability criteria (perhaps lowest carbon users and producers) to focus exposure on sector-leading companies.
- “Positive Tilt” overweights investments that fulfil certain sustainability criteria and underweights others relative to an index.mpact Investing
1.5 Impact Investing
Defined as: “Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
An important part of impact investing is promoting its use more widely amongst the general investing community. According to the Global Impact Investing Network (GIIN) the other key elements of impact investing are:
- Intentionality: Impact investments intentionally contribute to social and environmental solutions. This differentiates them from other strategies such as ESG integration, stewardship and exclusions.
- Financial Returns: Impact investments seek a financial return on capital that can range from below market rate to risk-adjusted market rate. This distinguishes them from philanthropy.
- Range of Asset Classes: Impact investments can be made across asset classes including bonds, private investments or listed equities.
- Impact Measurement: A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance of underlying investments. Often the positive impact sought will be on one of the UN’s Sustainable Development Goals
1.6 Greenwashing
As environmental awareness has grown, so have instances of companies pretending to be greener than they are.
Greenwashing is a form of marketing spin, in which a false impression is given, or misleading statements are made, to persuade the public that an organisation’s products, aims or policies are more environmentally friendly than they actually are.
For example, a fund branded as being ESG without having investment processes and portfolios consistent with that claim, or a fund which a word like “sustainable” in the name, which, for example, invests in a business that derives most of its revenue from fossil fuels, but is included in a “sustainable” fund as said company also has capital invested in renewable energy projects.
Regulators, governments and multi-national organisations recognise this problem and are taking action against those providers who appear to be branding their offerings in a way that could be misleading for end investors.
In part they are doing so by improving transparency for investors, for example the EU with its forthcoming ‘Taxonomy’ of environmentally sustainable activities and proposed Ecolabel for retail financial products.
On the domestic front, regulators will require investors to ask clients about ESG funds as part of the fact find, this is likely to increase the focus on the quality of ESG products.
