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 rankings

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.

A note to investors

In 2024, the Financial Conduct Authority (FCA) introduced the Sustainable Disclosure Requirements (SDR) and associated investment labels. The FCA’s framework introduces four distinct labels designed to provide investors with clearer insights into the sustainability characterises of investment products. These labels are:

  • Sustainable Focus: This label is for funds that primarily invest in assets that are already environmentally and/or socially sustainable. These funds will need to show that at least 70% of their assets are aligned with sustainable objectives.
  • Sustainable Improvers: This category targets funds that aim to improve the sustainability performance of the assets they invest in over time. The focus here is on driving positive change in companies or sectors that are on a path towards better sustainability outcomes.
  • Sustainable Impact: This is for funds that invest in solutions that actively address specific environmental or social challenges, usually aligned with global goals like the UN’s Sustainable Development Goals (SDGs). These funds need to demonstrate a measurable, positive impact.
  • Sustainable Mixed Goals: This label is designed for funds that pursue a combination of sustainability objectives. Unlike the other three labels, which are more singular in focus (either on sustainable assets, improvements, or impact), this category allows for a more diversified approach.

These labels present a different approach than displayed on FundCalibre. Our ESG labels are based on our qualitative assessment of a fund’s approach to responsible investing. It’s important to note that our evaluations represent FundCalibre’s independent opinion and do not supersede or conflict with the FCA’s official labelling system.

Our labels serve as a complement to the FCA’s efforts by offering our perspective on a fund’s ESG credentials, providing additional context to assist investors in making informed decisions. We emphasise that our ESG labels are not recommendations to buy or sell any investment. They serve as an informational tool reflecting our qualitative analysis of a fund’s responsible investment approach. Investors should consider multiple factors and, if necessary, consult with a financial advisor before making investment decisions.