ESG stands for ‘environmental, social and governance’; the three broad headings used to assess and measure a company’s sustainability and ethical credentials.
Socially responsible investing, impact investing, ethical investing, sustainable investing; these are all terms that can be caught under the ESG umbrella. However, as with many things in life, not all ESG funds are created equal. Careful analysis is required in order to fully understand how a fund is invested and avoid ‘greenwashing’. That’s where clarity’s investment research committee comes in. We’ve added a comprehensive ESG overlay to our rigorous investment methodology, so our buy list now includes ESG fund options for all sectors covered. And each of our risk-rated model portfolios now has a corresponding ESG option.Download FAQs
More and more people are waking up to our collective need to be more conscious of our behaviour and the impact we have on the world around us. Climate change, circular economy, carbon offset, net zero – these are all now mainstream, everyday terms. Research from the sustainable investment movement, Make My Money Matter, showed that 68% of UK savers want their investments to consider people and planet alongside profit. And responsible investing covers far more than environmental issues; the social and governance elements are equally important.
Although some funds will have a specific ‘green mandate’ and environmental objectives, other ESG funds focus on companies who strive to make a positive impact in other areas. For example, the research, development and creation of products, services or technology that lead to significant improvements in human lives. Or companies who are leading the way in terms of equality, diversity and workers’ rights/treatment. All, of course, while looking for companies that they believe will deliver a good return on investment. And in recent years, sustainable and ESG funds have often delivered superior returns to their non-ESG alternatives.
Historically, ethical investing was a very niche area - so options were limited, early ethical funds were expensive to manage and often suffered from underperformance. With sustainability and human wellbeing now front and centre on the world stage, responsible investing has also become mainstream. This means far more choice, better quality options, increased transparency and lower costs.
In 2020, ESG funds* received new investments of €233billion – double the figure for 2019. As the market continues to grow and develop, even more options will become available. That’s why we keep our ESG portfolios, like all funds on our buy list, under continual review.
*Including exchange traded funds (ETFs). Source: Morningstar 2021.
Your ethical or environmental views are, of course, only a small part of the picture that must be considered when choosing investments. Your objectives, timeframes, attitude to risk and capacity for loss, as well as any tax implications, are all critical factors when setting your investment strategy. Our new ESG portfolios enable you to invest appropriately for your financial needs, with a responsible ESG overlay.
Building on our tried-and-tested investment management methodology, we’ve created nine risk-rated model ESG portfolios – using the same risk and timeframe scale as for our standard model portfolios. Alongside this, we’ve expanded our buy list so that each sector covered includes ESG options.
In addition to our rigorous and proven approach to wealth management, clarity is entirely independent, with no ties to any investment management group or platform provider. This gives us complete freedom and allows us to access the entire ‘ESG fund universe’ – which, as mentioned above, we keep under continual review.
In order for a fund to be considered for our ESG buy list, it must first meet the rigorous criteria required for inclusion on our standard buy list (see below). Our ESG screening then comprises two further stages: quantitative analysis and qualitative research.
Our quantitative analysis draws on information from Morningstar, a leading investment research company, and their subsidiary Sustainalytics, an independent ESG research and ratings firm. This provides us with breakdowns of where funds are invested at a stock level, and whether these qualify for a sustainability rating or a low carbon designation. These ratings produce a score for each fund, allowing them to be ranked accordingly in their sector.
As a typical guideline, for inclusion on our ESG buy list, we are looking for funds with at least a four-globe sustainability rating and, ideally, a low carbon designation. These benchmarks do, of course, necessarily change between sectors and regions.
There are then further metrics involved, including measurement of specific ESG factors and whether funds are focused on any particular sustainable aspects and/or any controversial investments.
In addition to the desk-based research described above, we conduct thorough interviews with fund managers, along with focus groups with our independent research partners at Investment Strategic Group, to ensure our selections are justified. Many fund managers will make some reference to ESG in their literature, but it is often a relatively small part of their stock selection process. It is therefore essential for us to ‘kick the tyres’ and ensure ESG criteria are a main focus of their investment process, rather than an afterthought.
Our full investment methodology guide is available on request. Please speak with your usual clarity adviser if you would like a copy.
Setting, managing and monitoring your investment strategy is typically one of the most complex areas of financial planning, and one where many people need ongoing professional advice.
clarity’s experienced, knowledgeable and personable team are on hand to help you.
If you’d like to know more about our ESG portfolios, or need advice in relation to any other aspects of your financial planning and investment strategy, please contact your usual clarity adviser. Alternatively, you can get in touch using the details below.
Important information and risk warning: The contents of this website are provided for information only and do not constitute advice. The past is not necessarily a guide to future performance. The value of your investment and the income from it can fall as well as rise and is not guaranteed. You may not get back the full amount invested.