How is ESG investment strategy changing?

Responsible investing has seen an acceleration in interest in the last few years. However, keeping up with new terminology and investment products can pose a challenge for advisers.

Responsible investing has seen an acceleration in interest in the last few years. Investors are increasingly aware of, and interested in understanding, the environmental and social risks and impacts of their investments. However, as the industry evolves so does the terminology and the products available, creating an ongoing challenge for many investors.

At FE Investments, we believe most investors prefer a straightforward approach to their responsible investment strategy. We expect them to be aware of environmental, social and corporate governance (‘ESG’) factors, either as investment risks in their own right, or as factors used for analysis to help their investments attempt to drive positive outcomes. We understand that bringing all these (sometimes conflicting) ideals into a managed portfolio service can be a difficult task for any adviser, but believe that clarity can be found.

Moving to a responsible future

With the rapid rise of responsible investing comes the need for a detailed discussion around the nature of responsible investing and how these ESG factors can be integrated into an advice process, PROD, and the wider investment process.

Much of the current conversation revolves around the immediate visibility of what an investor’s capital is doing, its direct impact. However, we know that responsible investing does not just involve screening out and excluding sectors from the investment universe, but a more nuanced approach is needed instead. In constructing a responsible portfolio, it is important to look at the data in relation to the underlying companies, to see whether businesses are being encouraged to improve their governance, or lessen their environmental impact, for example. We strongly believe that investors are concerned with underlying responsible investment factors such as decarbonisation, diversity and nuclear energy, for example.

These ESG factors have become part of the status quo, with the investment industry reframing it into ESG ratings as a way of demonstrating the ESG-related riskiness of a portfolio. We believe that these terms are alien to retail investors and also cannot deliver an investment outcome. Instead, we look to create an overarching framework for analysis to enable more meaningful investment decisions to be made and deeper insights to be had.

We see this holistic oversight as crucial to providing a responsible investment strategy suitable for the retail client. This framework not only allows us to engage with fund managers on the key issues, but also to make sure that your clients’ money is doing less harm, and more good, while still meeting the key risk and return targets.

Avoiding the greenwash

As with any investment trend, it is inevitable that some will attempt to shortcut a more sophisticated investment process or will repackage an existing product in order to appear ahead of the curve. This approach brings the idea of greenwashing centre-stage as it means end clients often cannot be certain that their money is being invested in a responsible manner that fits their principles and broader views.

To combat this and bring more clarity to advisers and their clients, we at FE Investments have worked to enhance our ESG reporting across our portfolio ranges in order to bring greater clarity to the investment process and the outcomes. By focusing more on the real-world outcomes that are being achieved by responsible investors, we can help advisers put their clients at ease and help make them aware that their investments are delivering on their principles and helping to generate positive outcomes.

How can FE Investments help?

The responsible investing world might feel like a minefield at first, but there is a broad framework available to help identify what’s appropriate for individual clients’ needs. Our approach is to use this framework to build investment portfolios that align with investors’ values and objectives. Our range of portfolios provide solutions allowing retail investors to pick a ready-made portfolio to meet their needs.

Our portfolios cover a wide spectrum of outcomes to ensure clients have enough choice of the types of investments they’d like to make. Our Hybrid, Income and Mosaic portfolios emphasise risk management, where ESG factors are part of the process but the objective not such a high priority. In contrast, the Responsibly Managed portfolios combine sustainable and impact funds together, and delivers a more progressive outcome to do more good. By doing so, we can target a broad client base and help IFAs advise their clients effectively.

Find out more about our ESG investment strategy