Picking the right sustainable fund: three questions to ask


Panel discussion, hosted by Cherry Reynard, with:
Jake Moeller – Senior Investment Consultant, Square Mile
Ben Constable Maxwell – Head of Sustainable and Impact Investing, M&G Investments
Toby Gibb – Global Head of Investment Directing, Fidelity International

There is more choice than ever for those that want to invest with purpose. There will be vanilla ESG funds, through to highly specialised impact or thematic funds. Each will have a different impact on the broader portfolio. How can advisers ensure they are picking the right fund for the right purpose for a client who understands what they’re getting?

Sustainability funds bring some additional challenges for advisers, not least an understanding of the non-financial goals of the fund. This remains an area where definitions can be fluid and advisers need to read the small print. With that in mind, there are three key questions for advisers:  

Do you have clarity on the non-financial metrics?

Advisers will be well-versed in assessing funds according to financial metrics and will have plenty of tools at their disposal to do so. However, ESG, sustainability and impact funds bring a requirement to understand a raft of non-financial metrics. These will often be mapped to the UN’s Sustainable Development Goals, but advisers need to understand how fund managers are doing that.

Toby Gibb, global head of investment directing, Fidelity International, says the onus is on fund managers to be clear about their goals: “First, advisers need transparency - on the rationale for owning individual stocks in the portfolio and from a data and reporting perspective. Advisers have to ensure they understand the overall ESG profile. If you buy this strategy, how much clean water is produced, how much waste is recycled, how much carbon is taken from the atmosphere.”

If a client wants a tangible, measurable sustainability objective alongside a financial objective, impact funds are likely to be the clearest route. Ben Constable Maxwell, head of sustainable and impact investing at M&G Investments, says: “ESG is a risk assessment. It’s really important and it’s been the first step into a more sustainable real-world outcomes, but positive impact investment focuses on some of the world’s biggest challenges and allocates capital towards those, alongside a financial objective.” He believes this part of the market will get significantly larger and advisers need to learn as much as possible.  

How will the fund behave in different environments?

The composition of many sustainability funds, particularly those with highly specialised thematic objectives, will be very different to the broad market index. Even a relatively light ESG focus can change the investment parameters of a fund. This year, for example, ESG funds have tended to do well because of their high weighting to non carbon-intensive sectors such as technology and low weighting to out-of-favour areas such as oil, but this may not persist at a time of economic recovery.

This will also impact how advisers combine funds in a portfolio. Gibb says: “Combining a strategy that has more of a focus on technology with one that has more of a focus on water and waste gives advisers a broader balance and a more diversified overall portfolio. They can blend them together to give a more diversified outcome.”

Can you communicate it to clients?

Many advisers will have seen first-hand the gap between expectation and reality for clients. Clients have a different view on what constitutes ‘ethical’. This can be a particularly thorny issue with engagement strategies. Gibb says: “A ‘best in class’ strategy might own an oil company because it’s the best company in its sector and it’s transitioning. It has strong governance and societal commitments, but that might be different from what investors might expect from ESG.”

It is vitally important that advisers manage client expectations on what can be achieved with their investments. While the sustainability industry is progressing quickly, it is some way from offering personalised solutions based on individual ethical preferences.

Jake Moeller, senior investment consultant at Square Mile, says fund management groups need to help advisers where possible: “Advisers want straightforward solutions to this, because over-thinking it can make their lives really difficult.” He wants to see fund managers step up on areas such as multi-asset to provide ready-made solutions for advisers.