How to select ethical funds

2 minute read

In this short Citywire New Model Adviser®, ‘Adviser Feature’ Quintin Rayer gives a very brief overview of some issues that advisers might wish to consider when choosing to select ethical and sustainable funds.

New Model Advisor

Q G Rayer (2018), How to select sustainable funds, Citywire New Model Adviser®, issue 588, Adviser Workshop feature, p. 16, 16 April 2018.

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The challenge facing ethical investors is to select companies and monitor their performance in ethical and sustainability terms. However, environmental issues, social responsibility and governance quality are not readily measurable. Consequently, many investors employ the skills of fund managers running ethical strategies, either as specialists or as part of their broader offering.

A concern is whether managers lack ethical investing experience or commitment, but want to ‘jump on the bandwagon’, launching a fund to appeal to the ethical market.  Some funds’ ethical credentials may be slender, potentially including holdings that would make clients uncomfortable.

Inexperienced providers may launch ethical funds which fail to deliver expected performance, eroding interest, potentially resulting in a merger with a conventional fund or dropping ethical objectives.  Fund selection should explore the ethical investing culture in the organisation.  Managers may talk positively about ethical investing for marketing benefits, thus to select ethical investors need to scratch deeper.

When managers consider a company for inclusion, apart from performance aspects, there can be challenging ethical requirements.  Corporate standards can help, confirming that specific activities have been conducted to defined standards.  There are many standards, with some bring more symbolic than meaningful.  Some are auditable, or encourage public reporting of progress, while others are purely aspirational.

Investors must dig beneath ostensible manager claims, since many desire a ‘green makeover’, while reluctant to absorb the associated costs. The complexity means that advisers may benefit from support by wealth managers knowledgeable in this area.