Advice clients are looking for ways to contribute to effective responses to major global issues but there is not always a straightforward way to help, according to Investing Ethically director and chartered financial planner, Lisa Hardman.
Here, Hardman speaks to ESG Clarity about how her approach to advising on ethical investments has changed over time and the kind of portfolios the firm offers.
How has your approach to ESG investing changed since you started advising in this area?
Our approach is becoming more sophisticated. Before, it was pretty much negative screening. Now it’s clients saying: “I want to do something good with my money, I want to be part of a solution. I want to be more picky about my ethics because I can, and because the choice of funds is better.”
We’re having to up our understanding of how the funds are selecting what they screen for, what their approach to FANGs (Meta, Amazon, Netflix, and Alphabet) is, which fund is vegan and which is not. There are tools out there you can do this with but actually talking to the fund manager [is better].
For example, one situation we had recently was with a Danish renewable company, with factories making wind turbines in Russia. We asked the client, “is that acceptable? Or do you want to pull out of the fund?”.
The difference is we are now pushing back to clients a little bit more: “You tell us what it is that matters and we can then build something that tries to match that as closely as possible”.
What’s a red flag for greenwashing?
A big distinction for us are the fund managers that have an in-house research team… as opposed to buying in some form of screening.
We have seen lots of screening from MSCI and Aviva, for example. They are all over the place. There is a lot of information there, but it’s not saying much.
I want to be able to relate to this information and to what I’m investing in. It starts to come down to individual companies, the stories and narratives you see, and about the intention of what the company is trying to achieve, not just a number. How are they trying to change? Because this is a process.
Ethical investment is about being part of the change – tackling climate change, human rights, equality and social justice – all these big questions that the world faces. It needs to be more tangible than just, “we are 25% below the carbon footprint of the FTSE 100”.
The information we get from them needs to be more sophisticated than that, because our clients want [that information].
Another red flag is if a fund group launches a new ESG fund with a lot of fanfare. It probably avoids tobacco and a little bit of something else, but that’s it.
How is investing changing in the face of the multiple crises we are seeing?
We’re seeing questions come in from clients about food at the moment. One of the issues within investments, not just ESG investments, is it’s actually quite hard to invest in food production.
But clients would like to so we are basically having to go back to them and say well there isn’t really much.
It’s one of those crises where people want to be part of a solution, but it actually involves going out and buying your vegetables in your local shop. It’s not really an issue people have been able to invest in very well, frustratingly.
With the energy crisis, in some ways Putin has done more for renewables than anybody else. He’s driving us towards renewables, and we have clocked that actually we can become far more self-sustaining on energy.
Clients want to invest in biodiversity but can’t do so easily. Again, it partly comes down to the growing of food and land management. It is a conversation we’re having, but we’re not finding it very easy to find answers. At least, not from an investment point of view.
It’s quite hard at the moment to see what assets are going to deliver a good return for clients. With interest rates on the rise, inflation running high, volatility in markets, corporate bonds and gilts dropping in value because interest rates are rising, uncertainty about supply chains in China, war in Ukraine and the instability, potentially, in Europe.
The debt crisis of Covid-19 now is coming to light in emerging markets, which are having to pay back all the Covid-19 loans they took out and with interest rates rising pegged to the dollar. It’s a little bit hard actually.
There’s no really obvious place to go. Renewables, in some ways, appease the guilt people have because they are investing in something that will benefit people a long way down the line. That’s a positive story when the world around us is feeling a bit depressing.
Where are the other gaps in ESG investing?
We have to go out of our way to get to ESG funds in emerging markets. It is quite hard, but equally, the disclosure is only just now coming. There is a transparency issue and the fund managers have to go out their way and go about their research in a different way, become a bit more hands on and do more talking to companies rather than relying on whatever [a company has] to disclose to list on a stock market somewhere. It’s just not detailed enough.
It would be good if the bigger pension industry took ESG far more to heart. Clients we have in defined benefit schemes, for example, would really like their pension schemes to be far more involved with doing social good – whether that be pension funds owning social housing on a bigger scale, or the infrastructure that’s required – why can’t pension funds get involved in this?
When we talk about ESG we often talk about individual investors as opposed to these really big institutional players. I don’t know how much of it is down to regulation and the limitations of the regulation or whether it’s being slightly unimaginative or not consulting with their membership, but I can see there is a big role for pension funds.
What are your preferred DFMs for ESG?
We use two DFMs: Rathbones and King & Shaxson.
We’ve used Rathbones for many years and we’ve got good relations with it and its team. They understand questions we have from clients. They know what they’re doing. And they have done it for a long time.
We use Rathbones for clients who are a little more mainstream ethics than King & Shaxson. [They are] more towards the community energy range of investments than Rathbones. We have talked to other DFMs and they will have some ESG overlay on UK equities, but as soon as we get to overseas stuff it falls by the wayside.
What would a typical portfolio look like?
For investments, the average portfolio has between 30% and 40% in UK equities, about 20% to 25% North American equities. This is a medium risk person. And about 20% to 25% fixed interest. And then increasingly more commodities – such as renewable commodities – anything between 2% and 8%. And then a little bit of property for some clients, but not everybody has property. Some people don’t like it on ethical grounds and it can be a bit illiquid. But we have the conversation. And then then there’ll be other things, 5% to 7% European.
The fixed interest will be a mixture of global and UK but probably primarily UK due to the ethical screening.
There are still not that many ethical bond fund, and not that many that have global.
What percentage of your assets under advice are ESG?
Probably about 98%.
With property, we [mainly] use only a couple of property funds, including the Legal and General one which, in our estimation, has some of the stronger environmental overlay criteria on how it runs its properties, what it does when it makes improvements, etc.
There are contracts clients hold where there aren’t any ethical options, but we can’t switch. Perhaps they can’t come out of the product because of tax or because it would become too complicated.
Every now and again, we end up recommending a product such as a structured deposit or a with-profit fund because that’s appropriate. It’s rare we recommend a product that is not ethical, but it does happen.
| Preferred DFMs for ESG | Rathbones King & Shaxson |
| Example ESG portfolio – constructed in-house | 30% – 40% UK equities 20% – 25% N American equities 20% – 25% fixed income 2% – 8% commodities 5% – 7% European |
| Percentage of assets under advice which are ESG | 98% |
