Julia Dreblow Director SRI Services, founder of the Fund EcoMarket fund tool, highlights how advisers can identify the most appropriate funds within this increasingly popular sector to meet clients’ individual needs
The area of sustainable, responsible and ethical investment has been steeped in myths ever since the first ethical fund was nicknamed ‘The Brazil fund’ way back in 1984 ‘not because it would help save rain forests’ but ‘because you’d be nuts to invest in it’.
What is less well known about that quote is that its author was the lawyer who had battled to gain regulatory approval for the fund and one of its first investors – albeit one with the help of a somewhat dry sense of humour!
I was lucky enough to be introduced to ‘sustainable and responsible investment’ (SRI) in 1991, when I was just starting out as a broker consultant at the then mighty NPI.
The area immediately made sense to me as the planet’s resources are finite and so business would need to ‘work smarter’. Coupled with the widespread anger about the Apartheid regime in South Africa it was clear to me that ‘profit at any price’ did not suit everyone.
What I could not understand then (and even later career at Friends Provident and as an UKSIF director), was why such matters were widely ignored by regulators and financial advisers.
Where Are We now?
Fast forward to today and we are in a rather different place.
The Paris Climate Agreement and UN Sustainable Development Goals have recently passed their third anniversaries and the UK’s Climate Change Act is over 10 years old.
The EU’s desire to tackle climate change and encourage sustainable finance (their Sustainable Finance Action Plan was recently published) is helpful, as are the UK’s ambitions to lead in this area. Indeed, Government departments and regulatory bodies, including the PRA, FCA, FRC and DWP are all beginning to bring climate change and ESG into their rules and guidance. Work on taxonomies and labels by the IA, BSI and EU should also prove helpful.
Most relevant for financial advisers however are the proposed MiFID II changes that may see SRI Fact Finding (and related support processes) become obligatory.
Of course, many investment managers have been on this page for some time. Strategies range from ‘ESG integration’ – primarily used to mitigating environmental, social and governance risks – to ‘responsible ownership and engagement’, where the leading edge ‘forceful stewardship’ is being felt by Shell and others, thanks to the work of the ClimateAction 100+ investor coalition.
Between these extremes are, as you will know, many fund options to choose from. There are screening and thematic (avoid and/or support) strategies that combine ethical, social and environmental issues – often alongside engagement and risk mitigation – in many different ways.
Indeed this area has enjoyed exceptional growth recently. The recent Global Sustainable Investment Alliance (GSIA) report indicated an increase of nearly a third in two years, with worldwide assets exceeding $30 trillion as at 31/12/2018. The report showed ‘Avoidance’ remains the lead approach internationally, with ‘ESG Integration’ and ‘Corporate Engagement / Shareholder Action’ in second and third places respectively (measured by AUM).
The report also pointed to growing ‘retail’ demand – now estimated at a quarter of the total. My guess is that Blue Planet 2 being beamed into living rooms up and down the land may have worked its magic here and is focusing clients’ minds on the bigger picture.
How do I get Started?
Unsurprisingly perhaps, this question is increasingly being asked by advisers.
To make a success of investing in funds within this area – and not feel like you are going around in circles – it is essential to recognise that few issues are truly ‘black or white’. Fund manager and client motivations, opinions and preferences all vary – meaning that fund options are necessarily and legitimately diverse and dynamic.
Three of the most common client ‘motivations’ are:
- This area makes ‘fi nancial sense’. The world is changing, companies need to be cleaner, greener and more forward looking – and to precis – higher ESG standards are good for business (and therefore investors).
- The second relates to personal values and lifestyles. Clients who are particularly concerned about issues like climate change, animal welfare and poverty generally want their investments to reflect those views.
- The third is around desired outcomes, impacts and how we want the world to be in the future. Investment plays a significant role in shaping the world and so should be used as a positive ‘change agent’.
A further factor is that ‘issues’ change over time. For example, apartheid in South Africa has ended but modern slavery remains. The hole in the ozone layer is shrinking – but climate change is moving faster than expected. And of course, new technologies, solutions and opportunities emerge – and must continue to do so.
What’s what within the SRI funds universe?
As such ‘issues’ are often the front of mind for clients yet hard for advisers and paraplanners to find information on, the Fund EcoMarket tool leads with these. Its ‘SRI Styles’ include three ‘ethical values’ led strategies (Balanced Ethical, Negative Ethical and Faith based), three ‘themed’ approaches (Sustainability, Environment, Social) and ‘ESG Plus’ (where risk takes centre stage but must be supplemented with noteworthy SRI activity). These sit alongside approaching 100 filter options that list different issues, approaches and corporate strategies – plus standard investment filters.
What exactly are advisers searching on?
Looking behind the scenes by using this free to use tool helps illustrate why so many options are needed. The top searches (filter option clicks) since the start of this year have been: ‘OEIC, ‘Equity’, ‘Sustainability Themed’, ‘Global’ and ‘Mixed Asset’. Also near the top are ‘Ethically Balanced’ (ie best in sector / fund balances pros and cons) and ‘Negative Ethical’ (focused on exclusions). The next highestranking issues related searches were ‘Environmental’ and ‘Sustainability’ themes and policies, ‘Avoidance of armaments’, ‘Excluding coal, oil and gas majors’, ‘Climate change/GHG policy’ and ‘Avoiding animal testing’ and ‘Avoids fracking & tar sands’. And incidentally avoiding ‘Pornography, Gambling and Tobacco’ (in that order) are all also in the ‘top 50’ searches (of a total of 4849 events, Analytics). An eclectic, but fascinating, mix in my view!
This mix shows the importance of starting with an ‘open’ initial fact find question – where nothing is assumed – and being able to offer multiple fund options.
Supplementary fund act?
This should then be supported by a supplementary fact find. Some advisers prefer to start with ‘SRI Styles’ (or general areas of interest) and then drill down to specific issues and approaches. Others offer clients a list of ‘issues’ – before mapping these to asset types, geographic regions and product options.
Why should I bother?
Yet with many historic myths long since buried, I remain aware that some advisers may still be wondering why they should bother with this or how relevant it is for clients?
To help answer those questions, I will leave the final word to Mark Carney, Governor of the Bank of England, whose work in building climate resilience into financial systems is highly regarded. In an otherwise broadly upbeat speech which he gave on 21 March 2019 on sustainable finance entitled ‘A New Horizon’, Carney said ‘…the task is large, the window of opportunity is short, and the stakes are existential’.
To me, that seems to sum it up pretty well.
About Julia Dreblow
Julia Dreblow is a founding director of SRI Services and runs the fund manager supported FundEcoMarket.co.uk tool that is designed to enable financial advisers to match clients’ aims to sustainable, responsible and ethical fund options. She has been a leading proponent of this area for over 20 years and in addition to running Fund EcoMarket, being a director of UKSIF – and on various advisory boards – does consultancy, policy consultation work, media, events and speaking engagements.