It is increasingly common to find fund managers who say they consider environmental and/or social issues when deciding where they invest – however, in reality, few funds take such issues as seriously as they should.
Funds that give ESG (environmental, social and governance) issues serious consideration generally refer to themselves as ‘sustainable’, ‘responsible’, ‘ESG’ or ‘ethical’ funds.
Although the differences in fund strategies worries some, the true story behind most of these fund is that they a have been designed to reflect different opinions. These differences is strategy make it possible for individual investors’ often diverse personal preferences to be met – alongside their financial goals.
SRI Services lists all such funds (marketed in the UK) on our sister site Fund EcoMarket – which is open to all but specifically designed to help financial advisers to offer more bespoke advice to their clients.
About the role of investors
The role of investors is hugely important to companies but varies in different situations.
For companies that are already listed on the stock market the extent to which their shares are in demand causes their value to go up and down. This often linked to company success (in particular protection against take overs), board remuneration and other benefits – which mean companies generally to be in favour with investors.
In other cases, for example when a new bond is issued – or when a new company listed on the stock market (an ‘IPO’) , or issues new shares – investor opinion may dictate the value of an asset and sometimes an organisations access to new capital. These privileges can put investors in an excellent position to encourage higher standards when communicating with the organisation they are considering investing in.
For equities (shares) in particular the role of investors as ‘stewards’ (company owners) is particularly important because as part owners of the company equity investors have voting rights and may also have access to senior management. This puts equity investors in a strong position to encourage companies to adopt higher environmental standards.
These are of course not the only opportunities investors have to behave as responsible stewards – as other areas of business are also relevant such as relationships with employees, suppliers and customers – however Dialshifter focuses on investment companies’ activity as asset managers.
Funds and fund management companies invest in assets such as equities, bonds, property and infrastructure on behalf of individual investors. ‘Funds’ (typically pensions, unit trust/OEICs or other collective investments) are selected, normally by financial advisers, to suit a client’s investment goals which may or may not include environmental issues.
For actively managed funds a fund manager decides which assets to hold and the relationship they have with the organisations they invest in. Their investment decisions are typically based on a view of the attractiveness of an asset – which may also include considering detailed environmental or social considerations as well as active engagement. Passive funds are different as they are designed to replicate the index they are ‘tracking’, which often have no – or few – environmental requirements, although some are involved in active engagement (stewardship). This is however an evolving area and we expect this to progress over time.