- There's no definitive answer to what makes a good ESG strategy
- Platforms are growing their responsible investing options but questions linger over authenticity
The wind has left the sails of many environmental, social and governance (ESG) focused funds. ESG funds have underperformed their conventional peers over the past year in the Investment Association’s global and UK sectors. Elsewhere signs indicate that demand may have faltered. According to Morningstar, flows into ESG-focused exchange traded funds (ETFs) came to €13bn (£10.95bn) in the first quarter, less than half of the €27bn inflow in the fourth quarter of 2021.
However, if market conditions have favoured energy stocks and other unloved areas, that’s not to say that sustainable investing is a passing fad – particularly when it comes to the environment. According to research carried out by Aviva (AV.) for the UK’s Make My Money Matter campaign last year, the average UK pension saver can cut their carbon emissions by 19 tonnes a year by switching their savings into a sustainable fund. That’s the equivalent of 21 times more than the combined annual carbon savings from using electricity from renewable sources, giving up flying and going vegetarian, the research says.
But this is where it gets a bit tricky. Some people think the most effective way to tackle the climate crisis is to get investors to avoid investing in high polluting companies. If enough investors do this, it sends a signal to these companies that their current business practices are not socially acceptable and makes it harder for them to continue to operate as their cost of capital increases.
Others believe it’s better to engage with high polluting companies as responsible owners, and put pressure on them to improve their climate credentials – rather than letting them fall into the ownership of less conscientious investors. The spike in energy prices when Russia, the world’s largest gas exporter and second largest oil exporter, invaded Ukraine serves as a reminder that the world is not yet ready to abandon fossil fuels.
There is no right or wrong answer, and conscientious investors can apply whatever strategy works best for them. When it comes to sustainable investing, there are several platforms set up to help.
New apps
A number of apps have emerged in recent years with a specific focus on sustainability. Clim8 may have come to your attention after winning £200,000 worth of advertising in The Times, The Sunday Times and Times Radio as part of Times Earth Ad Fund and securing a £2mn investment from Channel 4 Ventures, the UK’s largest ‘media for equity fund’.
The app, which launched in the app store in March 2021, constructs portfolios based on the following themes: green energy, clean mobility, climate technology, water systems, sustainable food and circular economy.
Investors can pick between three portfolios - ‘cautious’, ‘balanced’ and ‘adventurous’ - the majority of which are invested in fixed income and equities. None of the portfolios invest in fossil fuels, tobacco, gambling, weapons or big tech companies and the portfolios contain a mixture of funds and individual companies. The app provides a climate impact calculator, which shows the amount of CO2 reduced by the companies in your portfolio as well as clean energy generated.
Looking under the hood of the ‘adventurous’ portfolio, 75 per cent is invested in equities, with 26 per cent in individual companies (mainly listed in the US). Nineteen per cent is invested in fixed income with the rest in cash and alternative investments. Clim8 charges a platform fee of 0.6 per cent for constructing the portfolio – the same as Wealthify’s charge and lower than Nutmeg’s. Owing to market condition’s Clim8’s portfolios have underperformed their benchmark so far this year but founder and chief executive Duncan Grierson says the app has added 55,000 users over the past 12 months.
Circa5000, which recently changed its name from tickr, is another app with an ethical investing focus that has around 170,000 customers. The app offers a selection of ETFs vetted by Circa5000's team, and enables you to run filters and build a ‘people’, ‘planet’ or ‘people and planet’ portfolio. You can then pick between ‘cautious’, ‘balanced’ and ‘adventurous’ options. The app charges a subscription fee of £1 per month and a platform fee of 0.5 per cent per annum.
For a more hands on approach, the Big Exchange launched in 2020, offering 36 funds that its investment team considers have a positive impact on people and the planet.
Even if you don’t want to invest with a platform focused on sustainability, it might be helpful to analyse their portfolios and read their sustainability reports to help you think about your own approach to investing and look at their factsheets to see how the portfolios have performed.
Platform ethical lists
Another source of sustainable ideas is platform buy lists. Interactive investor's ACE 40 list is made up of the 40 funds, investment trusts and ETFs it believes are the 'best in class' ethical options from a universe of 140. All Ace 40 funds are categorised as ‘avoids’, ‘considers’ or ‘embraces’, based on their ESG philosophy and the portfolios are set up with help from Morningstar’s Manager Selection Services providing some independent analysis. AJ Bell and Hargreaves Lansdown don’t have a specific list for ESG funds, but you can filter for ‘responsible’ on their preferred fund lists and six options come up for each.
Robo advisers and neo brokers are building out their sustainable options too. Moneybox offers 24 socially responsible investing ETFs – and you can either build your own portfolio or select a risk profile and have a portfolio put together for you. Nutmeg also compiles portfolios of ESG ETFs, with varying levels of management.
Further considerations
Not everyone will be comfortable with a portfolio of ETFs. Ben Yearsley, director at Shore Financial Planning, thinks that for an effective socially responsible approach you need an active manager rather than an index with ESG ‘tilts’. He does however think that certain targeted ETFs, focused on areas such as clean water, could merit inclusion.
It’s interesting that fund managers with a ‘sustainable’ mandate typically benchmark against the MSCI World Index rather than its ESG equivalent. Might this suggest that they don’t consider an ESG benchmark as a sufficient comparator? Wealthify has taken a different approach to other robo advisers and the funds in its Ethical Plans are actively managed.
“The market is still lacking clarity and consistency when it comes to measuring and describing ESG solutions,” says Svenja Keller, financial coach at SK Inspire. “My tip for investors is (as with all things): look under the bonnet, read the fine print, compare different offerings against a list of criteria you have set yourself, ensure that you understand what you are investing in (in general and what the ESG objectives are) and focus on ESG as well as wider investment criteria.”
Be wary of any provider that sells you socially responsible investing or ESG as a performance enhancer. Until about six months ago ESG strategies generally outperformed broader market peers owing to their growth bias, but their fortunes have turned in recent months. If anything, for an authentically responsible strategy you should be prepared to sacrifice some returns.
