Thinking about ESG when making fund selections?

Helene Winch

Premier Miton Head of Responsible Investing

Helene Winch, Head of Responsible Investing, runs through the key ESG areas you should be thinking about when making investment fund selections.

What is ESG?
ESG is an acronym for the three central factors Environment, Social and Governance used by responsible investors to screen and select companies and other investments for inclusion in their portfolios. Using ESG screening criteria by itself does not automatically mean an investment fund is ‘sustainable’ or ‘responsible.’ You should always do your research first. Examples of what ESG factors can cover vary but they often include areas such as climate change, health and safety in the working environment and protecting the interests of shareholders.

Why is ESG increasingly important?
If you have a client who is one of the increasing number of people who want their investments to “do good” and have a positive outcome, they are part of a growing movement. More of us are taking sustainable and environmental, social and governance (ESG) factors into consideration when deciding where to invest money. Not only is that good news for the planet and societies we live in, but it is also helping many investors to find new opportunities.

Who can help me choose an ESG investment?
The Financial Conduct Authority (FCA) has recently published draft guidance (which is subject to consultation) on the expectations for sustainable fund labelling. Discussions in Europe also continue around the definition of sustainable investments, most especially ‘green’ investments, in the EU’s sustainable finance disclosure regulation (SFDR). However, in the meantime we are still waiting for the formal regulatory guidance.

What should I be looking out for?
There are two areas to consider here: the investment firm and the investment fund itself.

Firstly, investment firm level ESG considerations. Undertaking some initial basic checks on the integrity and commitment of the fund manager to responsible investing is a good idea including: are they signatories to the PRI and the UK stewardship code? Further useful information can be found at https://www.unpri.org/signatories/signatory-resources/signatory-directory and https://www.frc.org.uk/investors/uk-stewardship-code/uk-stewardship-code-signatories

Do they mention responsible investing and their commitment to it on their website? Reading a firm’s annual stewardship report should give a good idea of the house view on ESG factors as well as some of their voting and engagement activities.

As an example, Premier Miton’s own version of this document can be found at: www.premiermiton.com/wp-content/uploads/2022/05/Stewardship-and-Responsible-Investing-Report-2021.pdf

Secondly, fund level considerations. The old saying “does it do what it says on the tin?” is useful here. If it has terms such as ESG, responsible, sustainable in the title of the fund then it is important to understand what the fund commits to in the fund prospectus.

You can do this by reviewing the wording in the objectives, investment process and investment strategy section. Any ESG labelled fund should demonstrate how the portfolio managers deliver on these commitments for example in non-financial objectives reports.

Reviewing the outcome of the investment process, as in the actual fund holdings, is vital to check that there are no surprises lying in wait. Increasingly investment funds putting ESG at the heart of their process also report on engagement and voting activities that they get involved in.

Do non-sustainable funds avoid sustainable companies?
That is a frequently asked question. The short answer is ‘No.’ but it is important to understand that a fund without sustainable or equivalent labelling and no articulation on ESG in their prospectus should not be claiming to be green, sustainable, or having positive impacts.

They may however currently invest in some sustainable companies, but there is no commitment to do this. We have seen with the recent market turmoil following the invasion of Ukraine, some funds with exposure to sustainable companies suddenly switched back into oil and gas companies and companies related to military activities.

A non-sustainable labelled fund can and should be able to do this as there is no commitment to sustainable investment. It is very much up to investors to decide what investment style aligns with them.

Can financial data providers help me at all?
This is a growing area. Third party ESG fund rating tools are provided by companies such as Morningstar. These consider the headline ESG scores for an investment fund based on recent holdings, but do not consider the investment process, firm level ESG performance or stewardship activities.

FE fundinfo has also recently partnered with MSCI and will now include MSCI’s ESG fund ratings and data across its products, including FE Analytics, Trustnet and fundinfo.com. Users of these services will be able to access a wider range of ESG data based on underlying holdings, from the overall ESG score of a fund to more detailed metrics such as the social and governance measures and the fund’s carbon intensity.

An MSCI ESG fund rating provides a simple and comparable score again based on the underlying holdings.

Finally Square Mile, has a range of Responsible fund ratings. These were created to meet the demands from investors seeking to understand the expanding range of investments claiming to adopt a responsible approach. Square Mile’s Responsible ratings will be awarded to funds which they believe are best-in-class in their field and which fall into one of three categories:

 

  • Exclusion: funds which exclude companies or other entities which have a negative impact on society or the environment.

 

  • Sustainability: funds which encourage and reward positive change.

 

  • Impact: funds which seek to include companies or entities which have a positive impact on society or the environment.

 

We acknowledge that each of these approaches, or a combination of them, are attractive to differing types of investors and we therefore make no judgement call on which might be the most valid. Whilst ESG fund ratings are simple and easy to understand, they are only one opinion.

In my view nothing beats an actual meeting with the portfolio manager, kicking the tyres on their investment process to understand what makes them tick and how they consider ESG in their decision-making process.

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Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Funds that follow an ethical investment approach exclude companies which do not meet their ethical criteria from the investment universe and therefore can carry a higher risk than funds with a more diversified portfolio.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE

008193/211122

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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