Cutting through the hype
One of the biggest challenges facing advisers is finding a fund that is genuine and meets the need of the client.
Plenty of companies in recent years have jumped on the ESG bandwagon in the hope that aligning themselves to the green cause will increase profits.
The vagueness of current ESG ratings can provide an obstacle when comparing performance between companies, amplifying the risk of greenwashing.
Critics also argue that corporate ESG disclosure is often lacking and that the data is poor.
Mike Myers, investment manager and head of socially responsible investing at Punter Southall Wealth, says it is important to go with fund managers who generate ideas rather than use an ESG ratings agency.
“Heavy reliance or filtering by ESG ratings attributed from an agency is not an acceptable practice in our view,” he notes.
Mr Myers says thematic managers who generate ideas by evaluating global megatrends and identifying long-term structural growth themes have a greater advantage identifying opportunities.
He adds: “Another significant aspect is the fund manager’s ability to interpret and digest the non-financial factors relating to the underlying investment and how they make their own assessment on the ESG credentials of the potential investment.
“Allocating to managers with different but complementary approaches will aid diversification, mitigate concentration risk and ultimately achieve a better outcome for the client.”
With all the hype surrounding ESG, there is growing concern that some funds have been overbought.
Bruce Jenkyn-Jones, co-manager of the Impax Environmental Markets investment trust, says investing with an active fund manager is the key to being able to avoid stocks that are mispriced.
He says: “Active managers seek to get underneath the skin of a company to work out what is really going on behind the scenes. It is also important to look at the ESG activities of these companies in detail and ask yourself how they are integrating ESG risk considerations into their practices.”
Opportunities
The performance of sustainable funds during the pandemic means the integration of ESG factors into portfolios is likely to become the new normal.
With the pandemic fuelling greater interest in ESG from clients it provides an opportunity for advisers to grow their businesses.
According to a recent Schroders UK adviser survey, 65 per cent of advisers said the crisis will increase the attention they pay to the ESG risks associated with investments.
Meanwhile, 88 per cent said the coronavirus crisis reinforced the importance of stewardship and using an asset manager who actively engages with company management.
Mr Jenkyn-Jones says environmental markets as a whole offer long-term opportunities, particularly in companies involved in clean energy, water treatment, waste technology and sustainable food.
