How ‘sustainable’ are ESG funds?

This week I’m not sharing my ‘PAYING FOR GOOD’ podcast. Instead, I’m putting the spotlight on ‘The Which? Money Podcast’, which is full of financial tips useful at home and work. One of its recent episodes asked: How ‘sustainable’ are ESG funds?

It’s a subject of huge relevance to pensions and responsible investment. So this week I’d like to share the highlights of that episode, as well as a few insights of my own.

Click here to play episode

Sustainable funds attracted £16 billion in 2021. This huge surge in demand prompted many asset managers to jump on the responsible investment band wagon. Over 1,000 ESG funds were launched and over 500 were rebranded as being sustainable!

Some are ‘exchange-traded funds’, or ‘ETFs’. They track a particular index, individual commodity, or group of organisations, and are more affordable. But while some are labelled ‘sustainable’, who are they tracking and what do they measure? In these funds, it’s not unusual to find organisations with controversial exposure to CO2 emissions for example.

As a pension saver, it’s so easy to get overwhelmed by the complicated literature and technical jargon. Do you really know the difference between ‘ESG’, ‘sustainable’, ‘responsible’, and ‘impact’? Not one has a standard definition. Until the regulators issue clear guidelines, confusion will prevail.

When it comes to pension contributions, ordinary investors like me are looking to:
• exclude certain sectors or firms from our investments
• help others transition to a greener, safer and fairer economy
• endorse those who demonstrate that sustainability is genuinely at the heart of their business

I have shared my preferences with my asset manager in their ethical questionnaire. (Have you asked your employees where they want their money invested?) But I would be lying if I said I always knew which organisations my investments were funding. It’s complex and I’m busy. Isn’t it why I pay fees to my asset manager in the first place?

The Which? Money Podcast episode encourages us not to totally rely on our asset managers’ work. Instead, it suggests we:
• look at the fund manager’s website to understand their investment strategy
• find the full (not just the top 5 or 10) list of companies included in each of our funds
• ask which firms were excluded and why
• decide if our preferences match those of our asset manager and where we wish to see a better alignment

I would also add to ask your asset managers if their client offering matches the range of pension investments they offer their own employees. I find it very telling where it doesn’t!

Asset managers who exaggerate their sustainable investments, or wrongly promote funds as ESG, risk fines and reputational damage. It amounts to mis-selling, so be vigilant in what you buy!

The above does not constitute financial advice and you should always make your own investment choices based on your own research.

Remember that whatever sector you’re in and however big or small your organisation is, base pay, incentives, benefits and pensions are all part of your Responsible Reward offering. By linking your and your portfolio companies’ sustainability and remuneration strategies, you become an employer, an investment and an investor of choice. If you wish to explore this topic further, feel free to email me.

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