Fund firms screen out SRI
Aviva is the latest mainstream investment house to pull away from offering specialist sustainable and responsible investment funds.
Last week, the firm, which runs £1.1bn in SRI funds, announced plans to move the funds and the team to another institution. It will tackle environmental, social and governance issues through a new global and responsible investment team which will look across the entire Aviva fund range to ensure these issues are being accounted for.
This follows Henderson’s decision last year to scrap its specialist SRI team. The £455m in funds are still running but the firm uses research company Eiris to provide the analysis for the funds which are run by the UK and global team.
In the third quarter of last year, ethical fund net retail sales fell to £46m, less than half the £93m worth of sales which were recorded in the third quarter of 2010.
UK Sustainable Investment and Finance Association chief executive Penny Shepherd says: “These developments are being driven by wider issues around the reconstruction of the financial services market. With the approach of the RDR, we are seeing product providers looking at what they have available and focusing on their core offering.”
Shepherd says Henderson’s move followed its acquisition of New Star in 2009 and Gartmore last year, when it reviewed its fund range.
Shepherd says as asset managers evaluate their core propositions and potentially move away from SRI, the market will become dominated by those who perceive SRI to be a central offering.
She adds that the visibility of specialist SRI information on platforms is an issue for the funds.
She says: “There is an opportunity for platforms to give more emphasis to SRI. They list the funds on standard platform services, but they do not make it easy to understand the different SRI strategies being used.”
SRI funds use either positive or negative screening or both. Negative screening involves starting from a universe of companies and screening out those that do not adhere to certain ethical criteria.
To avoid a fund manager having too small a selection of companies to choose from, positive screening can be used. This involves looking for companies that try to make a worthwhile contribution to society or the environment.
Kames Capital head of SRI and corporate governance Ryan Smith says he uses a negative screening method for the firm’s three ethical funds.
Smith says: “A negative screening approach is simple to explain to investors, whereas it is not so easy to explain positive screening in the sense of explaining one oil company over another, because of some subjective assessment.”
Vanguard head of sales Nick Blake also uses a negative screening method for the company’s two SRI funds.
He says: “The FTSE, which builds the index for us, uses a negative screening process where it screens out companies that fail the UN global compact screen.”
The UN global compact is a framework for businesses to align their operations and strategies alongside 10 principles in the areas of human rights, labour, environment and anti-corruption.
Blake says: “You want the broadest diversification possible in the fund. Negative screening means you start from the widest universe possible and screen out.”
He says positive screening is more difficult, as investors are clearer on what they do not like rather than what they do like.
In October, Vanguard decided to market its SRI funds to the retail market by launching sterling share classes. The funds were previously only marketed to institutional investors in Europe.
Blake says: “We started to get demand from advisers in the UK. There are some advisers that specialise in sustainable and responsible investment.”