Ethical investing is nothing new but environmental, social and governmental factors are becoming increasingly important. Investor demand is growing and the number of options available is expanding in response.
While the market cannot seem to agree on a set definition for these themes, the challenge for advisers is ensuring they are able to identify suitable investment paths for clients with such beliefs and preferences.
It is not easy but here are some sources of research that may help.
1. Clients looking to avoid certain areas based on ethical preferences
Tools have been available for a number of years to help with this traditional model of ethical investing. For example, Fund EcoMarket, which is free for advisers, helps with research and comparison of screened and themed SRI vehicles for sale in the UK retail market.
It covers over 400 funds from a wide range of recognised providers. Users can either browse through the range of funds available or apply filters on both negative and positive screens, themes and approaches.
Creator Julia Dreblow’s wider SRI Services website also provides useful information and guidance to help advisers entering this market.
2. Clients looking to support certain areas and help create a positive impact
While Fund EcoMarket covers the full range of options, 3D Investing focuses on investments that make a positive difference and avoid harm.
3D analyses around 200 UK retail funds, looking at the underlying holdings, track record and delivery of outcomes, including avoidance of ethical controversies, social impact, financial performance and transparency.
A 3D “star rating” enables easy comparison of the funds. Fund reports covering the analysis in more detail are also available.
3D has partnered with social impact investment resource Worthstone to enable filtering and comparison of these funds through its subscription-based research tool, Impact Portal.
Investors leaning towards philanthropy may also be interested in individual social investments such as Social Impact Bonds. Research on these options is also available through the Impact Portal.
3. Clients whose priority is to generate a return but also wish to invest responsibly in general
Rayner Spencer Mills Research awards a rating to a fund as a catch-all seal of approval in the SRI space, covering approaches including responsible ownership and engagement, sustainability, thematic investment and positive screening, as well as avoidance.
A report is available explaining the fund’s approach and process and why RSMR feels it deserves a rating. The service is free for advisers.
Clients in this group may also be interested in a model portfolio service focusing on this theme. EQ Investors is a DFM specialising in ethical and impact investing, which has a range of off the shelf “positive impact” model portfolios.
These are available to advisers on an agent-as-client basis. EQ is also able to offer a bespoke service under a tripartite agreement.
3D Investing is also able to help advice firms in building their own model portfolios.
4. Clients who believe ESG strategies are more likely to outperform others
Fund EcoMarket and Worthstone’s Impact Portal only cover funds that market themselves as ESG plays. Morningstar’s Sustainability Rating is applied to all funds, whether they market themselves as ESG or not.
It is a measure of how well the companies held by a fund are managing their ESG risks and opportunities when compared with similar funds. Morningstar uses company-level ESG data to calculate the rating, which is awarded using a graded system of Morningstar Globes, with five being the strongest.
As well as identifying further potential ESG opportunities, this rating could also be used as a monitoring measure for funds selected using one of the other resources discussed above.
The ratings are available for free by registering on Morningstar’s website. Subscribers to Morningstar Direct also have access to detailed reports and a breakdown of the analysis.
Julie Hardie is head of research at Threesixty