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Sustainable, Ethical and ESG Fund Approaches

Sustainable, responsible, ethical and ESG  ‘approaches’ 

Sustainable, responsible and ethical investment strategies respond to the issues they consider in different ways – their ‘approaches’ vary.

Some approaches significantly alter where a fund invests, others do not.

The issues and approaches a fund or portfolio adopts is referred to as its ‘policies’ .  Policies form an important part of an investment strategy – alongside regular financial considerations.

Funds typically apply one or more of the following approaches.  These are combined managed, and described in many different ways:

Positive asset selection

supporting companies (or other assets) that are helping to deliver positive or beneficial real world outcomes – by investing in them

  • This is a key feature of many investment options. Positive selection strategies tend to focus on certain business areas, themes or activities chosen by the manager. Decisions are often made with the help of specialist researchers who help fund managers to identify whether or not a company/asset fits the published criteria.
  • Strategies with positive selection strategies typically direct investment towards assets with the aim of supporting the delivery of positive real world benefits.
  • Some options that focus on measurable positive outcomes are referred to as impact investments. (Note – all investments have an impact).

Avoidance – or negative screening

excluding certain companies (or other assets) because they cause harm, or are regarded as undesirable or inappropriate – by not investing in them

  • Avoiding certain areas is a commonly employed strategy in this area.
  • Exclusions are commonly associated with ethical investment, however this approach is common across sustainable, responsible and ESG strategies also.
  • Exclusions may involve not investing in certain business activities, industries or behaviours.
  • Exclusions vary.  Some strategies avoid a small number of areas – such as tobacco companies and companies that make controversial weapons – other strategies are more extensive.
  • Exclusions reduce the number of companies (or other assets) a fund or portfolio can invest in – however the depth and breadth of exclusions varies significantly.

Stewardship

encouraging higher environmental, social, and / or governance standards through responsible ownership activities – for the benefit of investors and others

  • Engagement – also known as ‘stewardship’  is different from other approaches as it is about the relationship an investment organisation has with the assets they hold – or could hold – rather than relating directly to buy/sell decisions.
  • Stewardship activity primarily involves dialogue, voting and other forms of responsible shareholder activity – such as potentially drafting or supporting shareholder resolutions or withholding capital.
  • Stewardship and engagement activity may be undertaken by bond investors prior to issuance with the aim of raising standards, so that the asset becomes more attractive or allowable for investment.
  • Stewardship strategies may apply to individual funds or portfolios – or across all assets held by a fund management entity.
  • Stewardship activity can take a long while to succeed and is typically reported on annually by managers (in varying levels of detail).
  • Investment companies may describe their stewardship / engagement processes, requirements and necessary milestones in an ‘escalation plan’.
  • Stewardship activity may or may not lead to the exclusion of assets.

 

UK funds are required to adhere to a wide range of SDR requirements – introduced here.

 

Managing ESG risk

It is increasingly normal for investors to aim to manage environmental, social and governance risks as these are increasingly likely to impact financial performance – this concept is know as ‘materiality’.

Many fund and portfolio managers integrate ESG risk into their analysis of all, or most, of their assets.

Sustainable, responsible and ethical funds tend to pay closer attention to ESG risk than most.

In summary

Funds combine these issues in many different ways when responding to environmental and social issues.

The filter options on the FundEcoMarket database will help you to identify and understand individual strategies.