Almost all (97%) of advisers surveyed said they were either ‘very concerned’ or ‘fairly concerned’ about the potential for clients becoming aggrieved that their money is invested in a firm deemed unethical, despite being labelled as an ESG investment.
In recent years, environmental, social and governance (ESG) investment products have exploded in popularity. The problem, however, is no one is quite sure what counts as an environmentally or socially ethical company.
This, according to a survey carried out by Cicero, in conjunction with EdenTree Investment Management, is causing concern among financial advisers. Almost all (97%) of advisers surveyed said they were either ‘very concerned’ or ‘fairly concerned’ about the potential for clients becoming aggrieved that their money is invested in a firm deemed unethical, despite being labelled as an ESG investment.
According to Neville White, head of responsible investment policy and research at EdenTree Investment, this concern is holding back ESG investment.
He notes: “This is a significant barrier for providers of badged ESG, ethical and responsible funds to overcome. A sizeable proportion of advisers do not feel well served by the information from providers about the nature of business activity, the ethical profile of businesses within funds, and the specific ESG ratings of firms included within such funds. There is, consequently a strong risk of product mis-selling.”
According to EdenTree, the issue is not a result of a disagreement between clients and advisers. The survey shows that regardless of any ESG score a company may receive, most advisers said they agreed that an ESG fund should never include companies from the tobacco industry (94%), weapons manufacturing industry (93%) or pornography (91%).
However, while there might be some sense of agreement on what should not be in an ESG fund, it is still not clear what should be included – and that is likely to anger some clients.
Traditionally, ESG funds simply excluded such sin stocks, screening them out of the stock picking process, with little said of what should be in the fund’s portfolio. In recent years the ESG investment industry has evolved and with it the definition of ESG.
Many ESG investment providers now emphasise that they have a more sophisticated approach than simply screening out so-called sin stocks. For instance, Rathbone Global Sustainability, invests in companies so long as they appear to be working towards helping achieve one of the United Nation’s Sustainable Development Goals.
However, according to the fund’s criteria, companies such as Unilever and Adobe qualify. While neither company is particularly known for “unethical” practices, to an investor under the impression that ESG certified funds invest in those with an explicit social or environmental mission (windfarm companies, say), their inclusion may cause some confusion.
Confusion and disagreement about what counts as ESG is also likely to intensify as (or if) ESG investing gains more widespread adoption. While a high number of financial advisers agree for now that clients looking for ESG products would agree that stocks in, for example, the weapons manufacturing industry are unethical, that’s by no means a universally held view.
Such a view may be widely held by early adopters of ESG investments, but to a more diverse range of investors, such a view towards weapons manufacturers is not a given.
If ESG investing gains adoption beyond a particular subset of investors that share broadly similar views, more disputes over whether a company or industry is or is not ethical can be expected.