Sustainable, Ethical and ESG Fund Approaches

Sustainable, ethical and ESG fund approaches 

Sustainable, responsible and ethical investments offer a wide range of strategies – combining different issues in different ways. The way in which ‘issues’ are dealt with, and applied to an investment strategy, is referred to the fund’s ‘approach’ to an issue.

Some approaches alter where a fund invests, others do not – all are implemented alongside financial considerations.  These are typically described in ‘policies’ which form part of a fund’s investment strategy.

There are many ways to describe the approaches funds take, but they broadly fit into three areas:

Supporting companies (or other assets) that are doing positive, beneficial or desirable things – by investing in them

  • This is a key feature of themed or positively screened investments. Such investments tend to focus on certain business areas or activities that they wish to support or benefit from. Decisions of this kind are normally made with the help of specialist researchers who help fund managers to identify whether or not a company fits the criteria they are looking for. Such strategies are likely to direct investment towards particular types of companies.

Avoiding companies (or other assets) that do things the fund has committed to exclude – by not investing in them

  • This is a key feature of negatively screened ethical investment. Negatively screened ethical funds avoid investment in specified business activities or industries. Funds of this type typically have a list of exclusions and assess companies against a range of social, ethical and/or environmental criteria in order to decide whether or not a company is potentially acceptable as an investment. This reduces the number of companies a fund can invest in – although the extent to which this is the case varies significantly.

Using investment rights (stewardship) to encourage higher environmental, social, or governance standards – by  ‘engaging’ for positive change

  • Engagement – also known as ‘stewardship’  is different from other SRI 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. Engagement activity primarily  involves using dialogue, voting and other forms of responsible shareholder activity – such as shareholder resolutions or withholding capital.
  • Engagement / stewardship strategies may apply to individual specific funds or across all assets held by a fund management entity.
  • Engagement / 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 ongoing stewardship / engagement processes in an ‘escalation plan’.
  • Engagement / stewardship activity may or may not lead to the exclusion of assets.

Related approaches that you will hear about include:

Delivering positive impacts

There is increasing interest in ‘impact investment’ – investing with express, clearly articulated aim of effecting positive real world changes.

The two key aspects of investing via a collective investment fund (such as an OEIC, SICAV or Pension fund) with regard to delivering improved social and/or environmental outcomes are:

  • ‘Intentionality’ – a stated aim to deliver positive outcomes through investment activity
  • ‘Measurement’ – work being carried out to assess or measure the benefits of investing in a particular way.  This area is new and although groups such as the GIIN (IRIS tool) are helping investors to achieve this, it is widely regarded as ‘work in progress’.

Funds that ‘Aim to deliver positive impacts’ and ‘Measure positive impacts’ can be identified via the filter options on Fund EcoMarket.

Fund EcoMarket does not list private market funds.

Managing ESG risk

It is increasingly common for investment organisations to manage environmental, social and governance risks as they can – and often do – effect fund performance (known as ‘materiality’).

Most funds in this area consider ESG risk, however their strategies will typically go beyond doing so (see above).

In summary

Funds can combine any number of these methods – sometimes employing different approaches to different challenges or opportunities to create an overall strategy.

Depending on which of these methods an investment manager uses, some investments may be quite similar to their non-SRI sector competitors, whilst others are very different.

See filter options on to identify individual fund strategies.