He explains that the level to which fund managers are fully embracing ESG stocks, or merely paying lip service, can perhaps be evidenced in the core philosophy of the fund and in their fund reporting.
“Does the fund manager have the capability and track record to execute a fund philosophy to address global sustainability, and are they able to demonstrate that in the reporting of the fund?
“Reporting must go beyond simply: what are the top 10 holdings? They must include: what are all of the holdings and are how are they addressing sustainability challenges?”
Mr Kapadia echoes this view: “ESG issues are long term, and investors are at the beginning of a long journey. Even those people committed to the destination cannot go too far as their competitors may have a more short-term strategy.”
He expects ESG stocks to become more of an approach or philosophy of investing as companies are having to change strategies to balance investors’ interests.
Alan Chan, chartered financial planner and director at IFS Wealth and Pensions, disagrees with the view that fund managers are under pressure to add green stocks to their portfolios.
He says his company adopts a stringent criteria when selecting ESG or ethical funds, including a minimum track record three years and the minimum size of the fund.
How to prevent greenwashing
Mr Kapadia says: “Self-regulation won’t be the full solution, but enhancing overall transparency by industry actors themselves will support the prevention of greenwashing.”
He adds: “This should include reporting about the level of ESG integration in the firm, the investment and engagement process and its underlying policies, holdings, voting guidelines and their results, impact measurements as well as external consultations, assurances or verifications.”
Mr Chan suggests the industry should agree on a common definition and framework for ESG investing to ascertain minimum standards.
He says: “[The industry could have] perhaps even an ESG ‘kitemark’ awarded by a professional body to show that [a company has] met the required standards and is reviewed regularly.”
The Investment Association, the trade body for open-ended funds, launched a consultation on sustainability and responsible investment in January this year.
The consultation closed on March 1 this year.
The consultation intends to create a voluntary UK standard for ESG funds, which the IA hopes will provide greater clarity to investors to understand the nature of the product in which they are investing.
Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, says: “[ESG is] definitely a ‘buyer beware’ market, and consumers and investors need to do their due diligence to make sure their investment choice suits their needs.”
She adds: “Don’t simply rely on the fund name to guide your choice, as sustainable/ethical/impact all mean different things to different people; it’s much more important to look at the detail of what each fund is trying to achieve.”
