For advisers seeking to construct portfolios that align with client needs, the proliferation of different terms to describe the ecosystem of products available that seek to invest in ways that conform to environmental, social and governance principles is a particular and new challenge.
The asset class began with the creation of ethical mandates, which sought only to exclude those companies that do not conform to the principles.
But in recent years, the evolution has continued, with products created that now allow clients to invest in specific themes, such as renewable energy, or on the basis of the positive impact those companies have on the world, as well as funds that take a responsible approach to investing.
Chris Iggo, chief investment officer, core investments at Axa Investment Managers, describes the different terminologies as “a nightmare”.
He says: “We are very early in the evolution and there is no standardisation. At Axa we have gone through several iterations of what we call things and part of the reason for that is the regulations are becoming more specific, especially in Europe.
"I think the difference really between the different products that come to market is that some are products which do ESG and some are about the process of how they invest, but this is recognised in the European regulations.
"An Article 6 fund, for example, is a standard fund that may take ESG factors into account, but does not have a target, an Article 8 fund is one that is more advanced and which will have ESG scores and in aggregate will aim to have a better ESG score than other funds in its universe.
"And an Article 9 fund is one that has very clearly defined key performance indicators, which are often linked to the UN sustainable development goals. These regulations are not in the UK yet, but they may be in future.”
Sarah Norris, investment director at Aberdeen Standard Investments (rebranding as Abrdn in the summer), says the differences in terminology is enabling some of the “greenwashing” she sees in the industry, as market participants rush to label products in line with where the latest market trends are as a way to attract fresh flows.
Unlike Iggo, she says she believes that those who simply integrate ESG into their process, rather than have a dedicated ESG remit, may be guilty of this.
She says: “Those who say they have ESG integrated into the process of investing, well, all fund managers should be doing that anyway, as that is part of assessing the investment case.”
Andrew Parry, head of sustainable investing at Newton Investment Management, says the evolution of terms is “a natural part of the coming of age of the asset class, in the same way as there are many different types of UK equity funds or US equity funds”.
He says the first rule for any company – whatever label is applied – is that they survive as a business, something which proves the business to be sustainable.
