How FundCalibre assesses a fund’s approach to responsible investing
Ethical investing has been around in the UK for more than three decades, but it’s only in the past two or three years that it has really started to gain momentum.
Today, the range of funds investing responsibly has increased dramatically – either with new launches or with old funds getting a make-over.
And, as their popularity has surged, so have the parameters of ESG investing, with each manager doing something different.
This means it can be very difficult for investors to know exactly how responsible a fund really is.
Responsible investing at FundCalibre
FundCalibre launched its Responsible Investing sector in 2015 – highlighting the funds in this category that our research team believe to be among the very best.
In 2022, FundCalibre began to include an ESG assessment on each Elite Rated and Radar fund note.
To keep things simple, FundCalibre assesses each fund as either ESG Explicit, ESG Integrated or ESG Limited.
ESG – Explicit
ESG – Explicit funds are those that have an ESG/sustainable approach at the forefront of their investment philosophy. The managers will go above and beyond simple integration, with an ESG filter used as a primary feature on the investable universe, and with ESG considerations having a fundamental impact on the stock selection process.
Funds in this category are likely to have an independent panel or consumer survey to determine ESG criteria and they will either actively avoid (negatively screen) certain companies or industries, and/or will actively target (positively screen) certain ESG characteristics.
All three environmental, social and governance factors will need to be considered when building the portfolio and there must be ongoing engagement with investee company management.
The wider asset management company must be a signatory to an ESG appropriate body.
ESG – Integrated
ESG – Integrated funds are those that embed ESG analysis within the investment process, as a complementary input to decision making.
The investment universe will not necessarily be restricted in any way, but later analysis will be used to enhance the final investment decisions.
At least two environmental, social and governance inputs will need to be considered before permitting a stock into the portfolio.
Managers that hold stocks that have questionable ESG credentials will need to evidence strong rationale for including the stock in the portfolio and show that extra analysis has been undertaken to accommodate the ESG risk.
The wider company will need to be a signatory to an ESG body.
ESG – Limited
Funds in this final category are those where the overall portfolio will not be materially influenced by ESG.
These funds may still have some element of ESG in their process or be managed by a company that enforces certain negative screens, but the overall portfolio will not be influenced by ESG.